UPDATE 1-"Empty pockets" to hurt retailers - Citi
* Consumers saving on necessities to increase discretionary budgets
* Cuts Target Corp to "neutral" from "buy"
* Cuts price target on J.C. Penney, Kohl's and Macy's
July 17 (Reuters) - U.S. retailers face a challenging back-to-school season as consumers tighten their purse strings, Citi Investment Research said, downgrading Target Corp by a notch to "neutral" and cutting its price targets on several stocks.
The downgrade comes a day after a report by the U.S. Commerce Department that said retail sales fell in June for the third straight month.
"Since we first introduced our 'Empty Pockets' theme ... the consumer environment has deteriorated further and ... sales trends have slowed for the broadlines retailers in July," Citigroup analyst Deborah Weinswig wrote in a note to clients.
According to Citi, in the 'Empty Pockets' landscape, consumers find ways to save on the necessities to stretch their discretionary budgets.
"Consumers stick to buying the basics and competition from both pure play e-commerce and off-price players puts pressure on our retailers," Weinswig wrote.
Unsold inventories due to soft traffic and conversion trends in June and July will hurt second-quarter margins, said Weinswig, who is rated five stars by Thomson Reuters StarMine for the accuracy of her earnings estimates on companies.
Retailers are experiencing trouble selling through clearance despite deeper discounts, she added.
High unemployment and anxiety about the economy hurt top U.S. retailers' sales in June with Costco Wholesale Corp , Macy's Inc, Kohl's Corp and Target posting disappointing sales for the month.
Citi cut its price target on Target Corp to $68 from $69, on Kohl's to $55 from $56 and on Macy's to $37 from $38. Citi also removed J.C. Penney from its "top picks live! list" and cut its target price on the stock to $24 from $40.
Shares of J.C. Penney closed at $19.58 on Monday, those of Kohl's at $47.65 and Macy's at $33.92. Target Corp shares were at $61.50 at end of trade on Monday.
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