The third quarter earnings of retail companies will be under pressure as dipping consumer demand, low same-store sales growth and poorer than expected festive sales, especially in discretionary categories like durables, electronics, watches, apparel and jewellery, will dent their margins.

According to reports from five brokerages, earnings for retail firms are expected to rise by 12-14% and sales by 18-20%, but high input costs incurred by aggressive space addition will pull down operating margins by 50 basis points. One basis point is the hundredth of a percentage point. ?Consumer spending in discretionary categories has witnessed a sequential slowdown, which is a result of sustained inflation and dipping consumer confidence,? says Gautam Duggad, research analyst at Mumbai-based brokerage Prabhudas Liladher.

Weak consumer sentiment persisted despite the festive mood. ?Heavy promotional spends and discounts offered during the quarter increased footfalls, but conversion rate was low,? says Abneesh Roy of Edelweiss Securities. ?While demand for apparel continues to be weak, food and FMCG segments are doing relatively well.?

The revenue growth for the quarter for Pantaloon Retail India, Titan Industries and Shoppers Stop will be led by space addition, as same store sales and volume growth decline.

?Same store sales growth was impacted due to low volumes and a poor conversion rate,? says Nikhil Vora, managing director, IDFC Securities. ?It will be in low single digit across all retail formats.?

Owing to declining same store sales growth, retail chains had to tackle piling inventories which strained their cash flows, writes analyst Amnish Aggarwal of Motilal Oswal in his Q3 earnings preview. Rising interest costs, an additional burden for debt-ridden companies like Pantaloon and Shoppers Stop, are eating into their profits.

According to an estimate by ICICI Direct, India?s largest retail chain, Pantaloon is expected to see a profit after tax de-growth of 6.3%. Pantaloon?s consolidated debt stood at R6,600 crore as of September 2011. Revenues, however, are likely to grow by 15% led by 0.5 million sq ft space addition during the quarter.

Shoppers Stop?s operating margins are likely to dip to 5.1% due to ongoing losses in its hypermarket business. ?HyperCity?s loss is expected to be at R16 crore,? says Vora of IDFC Securities. Apparel sales were also weak during the quarter and the company is estimated to grow its revenues by 12%.

For speciality retailer Titan, jewellery demand was strong in October led by Dhanteras and Diwali sales, but November and December saw a significant moderation in demand on account of high gold prices and increased volatility. ?Despite the festival and wedding season, jewellery volumes were muted,? says Roy of Edelweiss.

The watch segment will be aided by premium launches and a 5-20% price hike taken during the quarter. ?Titan?s margins, however, are likely to contract by 40 basis points to 9.6% as the depreciating rupee will impact its input costs (imported watch components),? writes Bharat Chhoda of ICICI Direct in a research report.

Quick service restaurant Jubilant FoodWorks witnessed a moderation in volumes owing to high food inflation, but maintained a healthy same store sales growth of 26%. ?We expect Jubilant to report 48% increase in sales and a 42% growth in PAT,? writes Aggarwal of Motilal Oswal.

In the coming quarter, softening of cotton prices might bring in some respite for apparel retail chains. ?Apparel companies may pass on the price benefits to consumers in order to revive volume growth,? says Roy of Edelweiss.