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Will retail stocks rally for the holiday season or a year-end retreat? (NYSE: TGT)


Father and son, Christmas shopping window

NoSystem/E+ images via Getty Images

Currently, concerns about inventory levels, high inflation and consumer spending habits are covering the retail space. As a result, any optimism into the holiday shopping season, often a boon to the space, is pretty hard to come by.

Indeed, according to EY, the upcoming holiday shopping season “may be the slowest since the start of the pandemic” amid continued economic uncertainty. The accounting giant’s Future Consumer Index indicates that 43% of consumers feel as though they have more assets than they need, while another 64% no longer feel pressured to keep up with trends. fashion trends.

However, with many retail stocks falling more than the broader market in 2022, it remains a question of how much pessimism has been priced in.

Consumers cut spending

The top concern for many shoppers when looking for gifts is inflation. Compared to 2021, the daily cost of food and energy costs are falling for consumers. In the latest CPI report, the cost of accommodation, food and medical care was among the sectors with the strongest price increases.

Bankrate senior economic analyst Mark Hamrick told SeekingAlpha in October: “There has been relief from high gasoline prices, which tend to bother consumers the most, but rising food and housing prices high is likely to persist for some time due to the influx of unwanted visitors.”

As these costs rise to impact consumers, the more discretionary spending that dominates the holiday season is likely to take a big hit.

Prometheus Alternative Investments CEO Michael Wang told SeekingAlpha: “Energy costs are about three times higher than in 2020. “Consumer wallets will be largely consumed by non-discretionary spending.”

He points to Amazon’s (AMZN) October’s key event, which reflects much slower sales than previous sales events, as a sign that the average consumer is holding back any urge to splurge money on arbitrary items. This is especially so because consumers still seem to eager to spend on forever-Travel is more expensivewhich means that the budget is stretched even beyond the inflationary impact.

“Consumers have been well-accepted and they have been resilient. The big banks are all emphasize the power of consumers, for example,” admits Prometheus’ Wang. “However cracks are starting to appear. Consumers may still be spending, but they are now spending more than they earn due to inflation.”

Still strong enough to tuck in socks?

Still, many analysts hope that the cracks won’t completely send consumers into holiday shopping, allowing retail sales to stay strong at least into the year-end.

Indeed, Wells Fargo recently forecast the upcoming holiday season as the “Final Storm” for consumers ahead of a likely recession that the bank’s economists expect in 2023. Therefore, there may still be opportunities in the short term.

“Certainly this year amid soaring inflation and deflationary consumer sentiment, the good time for holiday sales is over, isn’t it?” the bank’s economists asked curtly. eloquent. “Not following Santa’s clock; Our forecast predicts holiday revenue to grow 6% this year, which, if realized, would be above the long-term average of 4.6%. “

Such an increase would equate to almost $1.5T in holiday shopping spending.

Wells Fargo added that while it remains optimistic as it moves into 2023, consumer death reports in 2022 are premature with “strange staying power” continuing to challenge projections. most pessimistic newspaper. Additionally, the bank expects bargain hunting to boost visitor traffic to retail locations later in the year.

Brett Narlinger, Global Chief Commercial Officer for prepaid gift card provider Blackhawk Network, pointed to a similar move.

“Consumers can keep spending because they shop creatively and carefully,” he told SeekingAlpha. “People are looking for promotions and trying to spread out their holiday shopping. Deal-seeking behavior is rampant and in-store/online shopping is a smart strategy people are using to find the best prices.”

Promotion problem

That said, promotions that boost demand also have an adverse effect on margins. Of course, most retailers don’t want to cut prices just to boost demand, but rather to release the rising inventory levels that have become a nagging concern.

The problem has been especially obvious for retailers like Target (NYSE:TGT), Kohl’s (NYSE:KSS), Abercrombie & Fitch, Ross Stores, Nordstrom, Burlington Stores and TJX Enterprises – each of which has signaled its pursuit of increased sales to free up inventory. In the electronics sector, both Best Buy (BBY) was also flagged on October 19 by Evercore for its persistently high inventory.

Even Walmart (WMT), often one of the best companies in supply chain management, has been reminded cut profit forecast due to high inventories at the beginning of the year. The Arkansas-based retailer said in August that Inventory clearing work continues.

“Excess inventory will continue to extend the sales season even as Walmart and other retailers scramble to cancel billion-dollar orders,” said Tiffany Yeh, Executive Director of Retail at Boston Consulting. Group, tell SeekingAlpha. “Other retailers, including The Gap (GPS).

Just in the past week, these same inventory issues have affected Nike (NYSE:NKE), Under armour (UAA) and Adidas (OTCQX: ADD CODEIt then told investors in an advance notice on October 20 that inventory levels jumped by a staggering 63% between September 2021 and 2022, casting further doubt on the yield recovery. profits in the footwear and apparel industry.

Thus, the gift of strong sales resulting from heavy advertising can be like a coal for profit.

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