Rising cotton prices and other costs took a toll on quarterly margins at Macy's Inc and Ralph Lauren Corp , pressuring shares of both the department store operator and the upscale clothing maker.

Macy's shares were down nearly 5 percent in morning trading, while Ralph Lauren fell almost 6 percent. Marketwide anxiety about Europe's ongoing debt crisis also hurt the two stocks.

Both companies still beat Wall Street earnings estimates, as Ralph Lauren's revenue exceeded expectations and Macy's sales gains continued to outpace those of its rivals.

Macy's did raise its full-year profit forecast, but not enough to Wall Street's liking, considering the chain's stellar fiscal third-quarter earnings. That raised concerns about continued margin pressure during the holiday quarter, when Macy's typically makes about two-thirds of its annual profit.

The high-end guys are better able to raise prices, said Morningstar analyst Paul Swinand. Macy's is not the highest end.

Macy's gross margin slipped 0.6 percentage points to 39.4 percent during the quarter. At Ralph Lauren, it fell 1.4 points to 56.6 percent.

Ralph Lauren, whose shares hit an all-time high of $164.55 last week, is even more exposed to higher cotton costs. While much of what the company sells is high end, some of its brands for moderate-income shoppers, like Chaps, have less wiggle room for price increases.

Macy's, Ralph Lauren and other retailers and apparel makers have raised prices in recent months to pass on what they could of higher cotton, transportation and other production costs to shoppers. Reduced margins reflect how a company has had to absorb some of them.

Cotton prices have eased of late, but retailers and clothing companies will not see the benefit until mid-2012.

Macy's shares were down 4.8 percent to $30.62, while Ralph Lauren's fell 5.8 percent to $149.88. The broader Standard & Poor's 500 <.SPX> was down 2.3 percent.

BULLISH HOLIDAY SALES

Macy's, whose fleet includes about 810 namesake stores and the upscale Bloomingdale's chain, reported net income of $139 million, or 32 cents a share, for the third quarter ended on October 29, twice what Wall Street was expecting.

Still, Macy's only raised its full-year profit outlook by 10 cents a share.

On a call with analysts, Chief Financial Officer Karen Hoguet said the average price of items rose 5 percent, at the low end of its forecast, while the number of transactions rose 1 percent.

The department store operator affirmed its revenue forecast and still expects sales at stores open at least a year to rise between 4 percent and 4.5 percent in the holiday quarter.

Last week, Macy's, whose sales gains have regularly outpaced rivals like J.C. Penney Co Inc and Kohl's Corp , reported slower-than-expected October sales, a rare disappointment.

Ralph Lauren, whose brands include Polo, Club Monaco and Chaps, said net income rose to $233.5 million, or $2.46 a share, in the second quarter ended on October 1 from $205.2 million, or $2.09 a share, a year earlier. Analysts on average had forecast $2.24 a share.

Ralph Lauren expects revenue to rise at a low-teens percentage rate this quarter, prompting it to raise its full-year sales forecast. It now expects them to be up at a high teens to low 20s percentage rate, up from an earlier forecast in the mid-to-high teens.

(Reporting by Phil Wahba in New York, editing by Gerald E. McCormick and Lisa Von Ahn)

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