Goldman sees more softness in U.S. consumption

NEW YORK (Reuters) - Goldman Sachs downgraded high-end retailers Polo Ralph Lauren Corp (RL.N) and Coach Inc (COH.N) on Monday and warned that the U.S. economy was likely to tip into recession because of the weakening labor picture.

The brokerage also said it expected overall margin pressure to be worse and to last longer than it had initially anticipated, and it thought the second-half margin recovery it had called for could be imperiled.

"The department stores' sales and margins get hit the hardest (EPS revised down 23 percent) due to their highly discretionary sales mix and season-driven inventory positions, and apparel manufacturers are second in line," Goldman said.

Goldman Sachs analyst Adrianne Shapira cut Coach and Polo Ralph Lauren to "neutral" from "buy," saying spending on luxury items was beginning to weaken, and there was no visible catalyst on the horizon.

Coach shares were off 3.3 percent at $26 in morning trading, while Polo was down 4.2 percent at $52.98.

The brokerage also cut Sears Holdings Corp (SHLD.O) to "sell" from "neutral," saying it expects the retailer to experience accelerated share loss and profit pressures in an increasingly tough macro backdrop.

Sears on Monday warned that quarterly profit would be less than half as much as a year earlier and said domestic same-store sales had fallen 3.5 percent during the nine-week holiday period that ended on January 5.

Sears, run by hedge fund manager Edward Lampert, has seen its shares fall steadily from their high of $195.18 last April. On Monday, the stock was down 7.3 percent at $89.15.

With consumer trends set to weaken, Goldman said it would continue to advise investors to maintain a defensive investing posture through at least the first half of fiscal 2008.

It continues to rate Wal-Mart Stores Inc (WMT.N) and Costco Wholesale Corp (COST.O) at "buy," as their sales mix and value orientation should drive share gains, Goldman said in a note to clients.

(Reporting by Nachiket Kelkar in Bangalore and Pat Fitzgibbons in New York; Editing by Lisa Von Ahn)