Black Friday: Retailers face ‘margin squeeze’ amid inflation, strategist says

Christine Short, Wall Street Horizon VP of Research, joins Yahoo Finance Live to discuss the state of retail into the holidays, consumer trends, retail sales, and inflation.

Video transcript


BRIAN SOZZI: Consumers looking to lock in deals today, taking advantage of retail surpluses to ease the pain of inflation. Wall Street Horizon's VP of Research, Christine Short, joins us now to break down the retail landscape. Christine, good to see you here. Lots of bleak takes out there on the state of retail into the holidays. How bad do you think things will be?

CHRISTINE SHORT: No, I don't think it's actually going to be that bad. I think the consumer is still intact. That's what we've heard from most retailers for Q3 earnings. If you look at retail sales for October, still quite strong, of course. We got the consumer sentiment reading at the University of Michigan on Wednesday. And that was a little tepid. But again, there has been a disconnect between actual behavior and sentiment and confidence throughout this year with consumers. But if you look at the National Retail Federation, they're expecting a record number of shoppers. Actual spend is not going to be a record. But as you pointed out, people are out there looking for deals, right.

So the consumer behavior is changing a bit this holiday season as compared to last year. They are looking for value. They're being very choosy. They're probably buying less gifts, but the actual spend will somehow, you know, be around the same just because of inflation. But many CFOs, CEOs on their Q3 earnings calls, you know, pointed to this. We're having to offer deep discounts to push product. We want to be rid of this inventory glut as we head into the new year, and, of course, that squeezing margins. But the consumer, they are still, you know, quite resilient. It's just they're changing their behavior a bit, maybe trading down.

JARED BLIKRE: Yes, Christine. Clearing the deck. How are those margins-- how do you expect them to look on the other side of this when we're talking about the quarter of earnings from the current quarter?

CHRISTINE SHORT: Yeah. So this quarter, I think, S&P was expecting margins to be down around 10.7%. That's down from about 13.5%. So you are going to see that squeeze, because, again, they can't really push product without offering these promotions. Yet, cost of goods sold are still quite high. So a lot of times when, you know, inflation hits, retailers try to pass that cost onto the consumer. It's just getting harder and harder to do that. So you're going to see this margin squeeze. And then I think you're going to see that into the new year, because I don't think consumers are going to change their desire to shop for a good deal. The National Retail Federation survey showed 60% of retailers are-- sorry, 60% of consumers that are planning on shopping for the holiday season are really only doing so to take advantage of those great deals. And so this is something that retailers are going to have to contend with in 2023.

BRIAN SOZZI: Are there any retailers, Christine, doing it right?

CHRISTINE SHORT: Yeah. I think, like I said, there's certainly winners in the space. It's the discounters. We saw Walmart posting great numbers. You've got off price retailers like TJX companies, Ross Stores, home improvement, you know, that's still a bright spot within retail, Home Depot, Lowe's, you know. Anytime home prices go up, whether it be home prices or mortgage rates increasing, more people tend to stay in place and invest in their homes. And we're seeing that with those names. And then other places that consumers are spending their discretionary income, leisure. So we haven't seen demand for travel fall. We saw, you know, great numbers out of the airlines, cruise liners, even some hotels. So I think many consumers are saying, "Look, we haven't been able to travel, get together with family in three years. This is an area I'm not going to skimp. Whether I have to dip into savings, you know, put it on credit cards." And we're seeing household debt increasing to the highest level in 15 years.

So consumers are still willing to make sacrifices to do things like travel. And so that's one area of the economy and of-- kind of consumer spending that I see remaining strong next year.

JARED BLIKRE: And any trends you're noticing on the labor front. There's usually a push to hire people, just comparing this with previous years and some of the headlines we've gotten out of the tech sector, not related to retail, but we know that they've been engaging in layoffs. Any sense that there has been a downshift in hiring this year?

CHRISTINE SHORT: Yeah. I mean, you just shared some numbers. It does seem like a lot of companies are in, you know-- and it's typical this time of year, right. There are hiring freezes implemented. Of course, a lot of these tech companies way over hired in the last year. And so there are remedying that. And, of course, there is a big tie into the consumer, because you, depending on how comfortable you feel in your employment situation, might determine how much you're willing to spend. And so there's currently-- when I talk about the consumer, and I'm kind of generalizing, there is kind of a bifurcation though of lower and middle-income earners who actually are quite safe in this environment than high-income earners, who we have seen many of them lose their jobs from big tech companies.

So the lower and middle-income earners are those that are trading down. We're seeing them be a little more cautious. But we're seeing the luxury segment still do quite well. And I think that might change if you see more of these tech layoffs occur in the next year, which I think you very well may see because of the over hiring of the last year. But right now, if we talk about-- you know, you ask, 'What companies are doing it right?" Well, someone like Macys, who the namesake department store is not doing very well right now. But if you dip into their higher luxury segments, like Bluemercury, their beauty line, or Bloomingdale's, those are the areas that are quite strong right now.

BRIAN SOZZI: Well, Macys crushed it yesterday. I don't if you saw the Macys Day parade there, Christine. Paula Abdul really lit it up yesterday. That was just an awesome 3-minute performance. But before I let you go, so you see some of this retail malaise continuing into the first quarter of next year.

CHRISTINE SHORT: Yeah, I think so. And there's always a natural pause, right, in Q1, because everyone's, you know, really ramped up spending in Q4. So there's a bit of a break, I think, with consumers. But again, if we're looking for strength in the first quarter, I would think it would still be travel. We saw that from the airlines posting their numbers, saying, "Q4 holiday cent spending." Travel has not slowed. I think with the winter breaks, the spring breaks for kids in school, I think you're going to see that keep the first half of the year strong within travel. But, you know, the weak spots, department stores, apparel. I think you see that slowing, as you are now, right. This shopping season you're seeing kind of a slow in that area. And I think that continues into the first half of next year.

JARED BLIKRE: All right. We have to leave it there. But I really appreciate you stopping by and sharing those insights. Thanks, Wall Street Horizon's VP of Research, Christine Short.