Investing.com -- Jefferies downgraded Brilliant Earth Group Inc (NASDAQ:BRLT) and Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) to "Hold," warning that rising inventory levels across the U.S. consumer discretionary sector could squeeze margins and drag stock performance.

The brokerage’s 22-year analysis found that when inventory growth outpaces sales growth, gross margins contract by an average of 26 basis points per quarter, while stock returns tend to underperform the S&P 500 by 304 to 600 basis points.

"Retailers aren’t sophisticated,” as they order inventories up after a good year and down after a bad year, Jefferies said, cautioning that after strong 2023-24 sales, excess inventory could pose risks in 2025, especially if consumer spending slows.

Jefferies also lowered estimates on Kohl’s due to margin pressures, while recommending Five Below Inc (NASDAQ:FIVE) as a buy, citing contained inventory levels. It rated Lululemon (NASDAQ:LULU) a sell, pointing to peak margins and inventory build-up.

Beyond inventory risks, the brokerage highlighted additional headwinds, including a stronger U.S. dollar, rising freight costs due to Red Sea disruptions, and tougher year-over-year comparisons in consumer spending growth.

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