(Recasts; adds details)
Sept 29 (Reuters) - The sales trends for U.S. retailers have dropped sharply in the last two weeks as consumers have been rattled by the recent financial market fallout, and this trend could continue well into next year, Thomas Weisel Partners said.
"We believe retailers are running out of ways to mitigate weak sales after several quarters of inventory cuts and cost reduction. We also expect product costs to be flat to up after several years of decline. Thus, deleverage on negative comps (same-store sales) next year could be significant," analyst Liz Dunn wrote in a client note.
Dunn said deteriorating employment situation, tightening consumer credit and significantly higher home-heating prices are the real issues plaguing consumers. Also, housing values could take years to rebound, she added.
Dunn said sales trends will rebound somewhat as Congress approves the bailout plan. "However, the unease about housing values and the safety of investments that arose from the financial crisis will likely linger."
The analyst downgraded clothing and home goods retailer Urban Outfitters Inc (URBN.O) to "market weight" and Kohl's Corp (KSS.N) to "underweight."
Analyst Dunn said Urban Outfitters' downgrade was based on valuation, but added that she did not see "anything wrong with the story." The stock is up 27 percent year-to-date versus an 18 percent decline in the S&P 500 .SPX.
The company can continue to deliver despite the struggles other retailers are facing due to its superior fashion and smaller footprint, she added.
For Kohl's, a mid-priced retailer of apparel and home goods, Dunn said the lack of newness in the department store channel is a negative for the company, as the model is highly dependent on newness.
Dunn, however, upgraded Abercrombie & Fitch Co (ANF.N) and Coach Inc (COH.N) to "overweight" and Coldwater Creek Inc CWTR.O to "market weight."
Shares of teen clothing retailer Abercrombie have been hit hard recently as same-store sales have turned sharply negative and fashion looks to be off target, Dunn said. Recent management departures have fueled investor concerns, she added. Abercrombie shares have lost 23 percent of their value in the last one month.
However, the opening of the surf-inspired Hollister chain in the UK and the hiring of a new finance chief are both positive catalysts for the stock over the next three months, Dunn said.
Handbag maker Coach's shares have also been under significant pressure given investors' concerns regarding high-end and accessible luxury, Dunn said. Coach stock has shed 7 percent of its value in the past one month. "We do think luxury is suffering, but we think those concerns are priced in."
On Coldwater Creek Inc CWTR.O, Dunn said the women's apparel retailer has been aggressive about cutting inventory and reducing costs. It has beat consensus estimates in the last two quarters and appears conservatively positioned on inventory and costs for the back half, she added.
Following are Thomas Weisel's ratings and price targets on the retailers: COMPANIES RATING
Current Prior Current Prior Urban Outfitters Market weight Overweight $40
$40 Kohl's Corp Underweight Market weight $40 $53 Abercrombie Overweight Market weight $47 $56 Coach Inc Overweight Market weight
$34 $30 Coldwater Creek Market weight Underweight
$6 $6 (Reporting by Dilipp S. Nag in Bangalore; Editing by Himani Sarkar)