NEW YORKNEW YORK (Reuters) - Key retail stocks fell on Monday as investors feared that deep discounts offered by U.S. stores during the year's first holiday shopping weekend could sap profits and would not save a bleak season.

Department store operators were badly hurt, with shares of Macy's Inc down 8.8 percent, Saks Inc down 10.7 percent and JC Penney Co Inc down 6 percent.

Apparel chains also suffered, with Abercrombie & Fitch Co down 7.7 percent, Aeropostale Inc down 7.9 percent, and Urban Outfitters Inc down 5.3 percent.


Best Buy Co Inc was down 5.7 percent despite signs that shoppers bought electronics over the "Black Friday" weekend, which kicks off the U.S. holiday shopping season.

Even shares of discounters Wal-Mart Stores Inc, Big Lots Inc and Target Corp fell, though analysts have said they may come out ahead this season as cash-strapped consumers look for bargains.

The Standard & Poor's Retail Index .RLX> slid 5 percent, while the wider stock market, as measured by the S&P 500 Index .SPX>, was down 5.4 percent on manufacturing data that bolstered fears of a deep recession.

"Retail stocks are not looking like they're going to be a particularly desirable place to be if the economy moves from the mild recession that we've probably been in since the beginning of this year," said Barry Ritholtz, CEO and director of equity research at Fusion IQ.

"Now we're in a deeper recession, and the danger is this becomes an even deeper and more prolonged recession," he said.

Early results from the Black Friday weekend showed that sales grew both in stores and online, fueled by repeat trips, heavier online sales and deep discounts from retailers across the price spectrum.


Many shoppers said they were spending less on gifts this year, but more of them completed their holiday purchases over the weekend than in the past.

According to the National Retail Federation (NRF), shoppers spent an average of 7.2 percent more per person to nearly $373 during the four-day weekend from U.S. Thanksgiving on Thursday through Sunday. Total spending was $41 billion.

But the NRF kept its overall holiday season forecast for 2.2 percent growth unchanged, signaling that a sharp drop-off in sales is expected for the coming weeks.

That would represent the slowest growth in six years, as measured by NRF. Other experts have predicted sales could fall due to the shrinking U.S. economy.


"We thought mall traffic was good but lines were not as impressive as shoppers cherry-picked the best deals," said UBS analyst Roxanne Meyer. "We thought promotions would have been steeper, given retailers' inventory issues. The new reality is that 25 to 30 percent off is not going to cut it."


Anecdotal evidence suggests that retailers offering the best deals in the malls over the weekend were the most crowded, while those with no special promotions were relatively empty, said Credit Suisse analyst Paul Lejuez.

Retail promotions, such as American Eagle Outfitters' buy one top, get one half-off on another, or Aeropostale's 50 percent to 70 percent discount off all merchandise, are meant to drive customer traffic.

But such deep discounts eat into store margins, causing analysts to worry about quarterly profits. Investors will get a better view to that performance when some retailers report November same-store sales on Thursday.

Michelle Clark, a Morgan Stanley retail analyst, said the weekend's sales appear to have beaten muted expectations, but at a cost.

"We remain concerned about fourth-quarter gross margin, given extremely heavy promotional activity," Clark said during a discussion on Black Friday broadcast on the Internet.

Black Friday, the day after U.S. Thanksgiving, is the traditional start of the holiday shopping season and once marked the day retailers would turn a profit -- or get into the black -- for the year. A calendar shift this year resulted in a shorter period between Thanksgiving and Christmas.


Shares of Wal-Mart fell 3 percent to $54.05 on the New York Stock Exchange while Big Lots fell 7.4 percent to $16.22 and Target fell 7 percent to $31.41.

(Additional reporting by Nicole Maestri; Editing by Dave Zimmerman)