Are retail stocks due for a holiday rally or year-end retreat? (NYSE: TGT)

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Concerns about inventory levels, high inflation and changing consumer spending habits are currently weighing on the retail space. As such, any optimism about the holiday shopping season, usually a bargain for space, is pretty hard to come by.

Indeed, according to EY, the upcoming holiday shopping season is “likely to be the slowest since the start of the pandemic” amid continued economic uncertainty. The accounting giant’s Future Consumer Index says 43% of consumers feel they have more possessions than they need, while 64% no longer feel pressured to follow fashion trends .

Still, with many retail stocks plummeting more than the broader market in 2022, it remains to be seen how much pessimism is already priced in.

Consumers reduce their spending

Inflation is the top concern for many gift shoppers. Compared to 2021, daily spending on food and energy costs is weighing on consumers. In the latest CPI report, spending on housing, food and medical care were among the sectors with the biggest price increases.

“There has been relief from high gas prices which tend to aggravate consumers the most, but high food and housing prices seem to be lingering for some time as unwanted visitors,” Mark said. Hamrick, senior economic analyst at Bankrate, at SeekingAlpha in October.

As these cost increases impact consumers, the more discretionary spending that dominates the holiday season is likely to be hit hard.

“Energy costs are about three times higher than they were in 2020, which will really reduce discretionary spending, especially in retail spending,” said Michael Wang, CEO of Prometheus Alternative Investments, at SeekingAlpha. “Consumer wallets are going to be swallowed up mostly by non-discretionary spending.”

He pointed to October’s Amazon (AMZN) main event, which reflected much slower sales than previous sales events, as an indicator that the average consumer is holding back any inclination to splurge on discretionary items. This is especially true as consumers always seem eager to spend on ever more expensive travel, which means budgets are stretched even beyond the inflationary impact.

“Consumers have held up well and they have been resilient. The big banks have all emphasized the strength of the consumer, for example,” acknowledged Wang of Prometheus. “However, cracks are starting to appear. Consumers may still be spending, but they are now spending more than their income due to inflation.

Still strong enough to stuff stockings?

Still, many analysts remain hopeful that the cracks won’t totally drag the consumer into holiday shopping, allowing retail sales to remain strong at least through the end of the year.

Indeed, Wells Fargo recently predicted that the upcoming holiday season would be “the last hurrah” for the consumer before a likely recession that economists at the bank forecast in 2023. As such, there may still be opportunities to short term.

“Surely this year, amid soaring inflation and falling consumer sentiment, the good times for holiday sales are over, aren’t they?” the economists asked rhetorically. form the bank. “Not according to Santa’s watch; our forecast calls for holiday sales to grow 6% this year, which if realized would be above the long-term average of 4.6%.

Such an increase would equate to nearly $1.5 billion in holiday shopping spending.

Wells Fargo added that while they remain pessimistic heading into 2023, reports of consumer death in 2022 are premature, with the “strange endurance” continuing to defy even the most pessimistic predictions. Additionally, the bank expects bargain hunting to drive increased foot traffic at outlets through the end of the year.

A similar dynamic was hinted at by Brett Narlinger, head of global commerce at prepaid gift card provider Blackhawk Network.

“Consumers can continue to spend because they’re buying creatively and prudently,” he told SeekingAlpha. “People are looking for deals and trying to spread out their holiday shopping. Bargain-seeking behaviors are commonplace and hybrid in-store/online shopping is a smart strategy people are using to find the best prices.”

Promotional issues

That said, promotions that drive increased demand also negatively impact margins. Of course, most retailers aren’t keen on offering discounts just to stimulate demand, but to eliminate the high inventory levels that have become a lingering concern.

The problem has been particularly pronounced for retailers like Target (NYSE: TGT), Kohl (NYSE: KSS), Abercrombie & Fitch, Ross Stores, Nordstrom, Burlington Stores and TJX Companies – which each reported continued sales increases to eliminate inventory. In electronics, both Best Buy (BBY) were also flagged by Evercore on October 19 for continuously high inventory levels.

Even Walmart (WMT), usually among the best in supply chain management, was prompted to cut its profit forecast due to high inventories earlier in the year. The Arkansas-based retailer said in August that its inventory clearance work was continuing.

“Excess inventory will continue to extend the selling season even as Walmart and other retailers scramble to cancel billions of dollars in orders,” Tiffany Yeh, managing director of retail at Boston Consulting Group, told SeekingAlpha. . “Other retailers, including The Gap (GPS), plan to hold unsold items in warehouses to return to shelves later this year.”

Over the past week, these same inventory issues have plagued Nike (NYSE: NKE), Under Armor (UAA) and Adidas (OTCQX:ADDYY). The latter told investors in a pre-announcement Oct. 20 that inventory levels jumped 63% from September 2021 to 2022, casting further doubt on the recovery in margins in the footwear and apparel industry.

As such, the gift of strong sales provided by intense promotional activity can feel more like a lump of coal to the bottom line.

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