Motley Fool Money - Checking Out Retail’s Year

Episode Date: December 10, 2023

The key word for retail in 2022 was inventory. This year, it’s shrink. Deidre Woollard caught up with Motley Fool Senior Analyst Asit Sharma and Contributor Toby Bordelon to check out the retail landscape. They discuss: - How Americans are spending and changing their priorities. - The tech replacement cycle, and what that means for Best Buy. - A slowdown for Home Depot and Lowes. - Retail trends to watch in 2024. Tickers discussed: HD, LOW, BBY, LOVE, WRBY, LULU, NKE, UA Host: Deidre Woollard  Guest: Asit Sharma, Toby Bordelon Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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But the fact that there is no longer like a huge amount of inventory of these low-end chips sitting with manufacturers tells me that it's good conditions for those who are now looking to maybe replace a mouse that they bought during the pandemic when they were home because it's been a couple of years. So maybe that's a trend that will see some life in 2024. I'm Ricky Mulvey and that's Motley Fool senior analyst Asset Sharma. Deidre Willard caught up with Osset and Motley Full contributor Toby Bordelan to wrap up the year in retail. They discuss how spending trends changed and what that means for home improvement retailers, fast fashions comeback, and why everybody wants to be Lulu Lemon.

So let's start with one of the core stories of 2020, which I've called before the kind of unsinkable consumer. The consumer just kept spending. Good news, bad news, whatever was coming its way. You know, we just all kept spending. We kept going out. Now, the good news for the future is that inflation is going down, but the bad news is, you know, student loan payments are back. There are some signs of a little consumer weakness. People are saving less. They're putting more on credit cards. They're using more by now, pay later. So as you think about that, Asset, I'll start with you, how much are you worried about the consumer in the coming year? And how are you thinking about the consumer habits of the past year? Deidre, I'm looking at the year ahead as one of a reset for the

consumer. I think there's some spending exhaustion out there. You noted factors that are driving a little bit more hesitancy on the part of the consumer. The student loan payments starting up higher interest rates in general, which means that you've got a bigger payout to maintain your credit status if you're using credit cards to make those purchases. But I do think over the long The fact that the US economy has been able to pull off somewhat of a soft landing so far is a good sign for the intermediate term, even if we hit a slight recession next year. The consumer, which has been supporting the economy, pulls back. I think longer term, the growth of the US economy, the tightness of the job market, are factors

that are positive both for GDP growth and an eventual resumption of spend. if it's like, you know, late 2024, 2025. Toby, how are you thinking about the consumer? Yeah, you know, I think there is, as often says, some hesitancy for the consumer heading into the next year. But I also get the sense, or I have the sense, maybe this is incorrect, that a lot of the concerns we've heard about the economy from, you know, consumer sentiment, maybe not being all that great, that sort of thing,

might just be a product of the, price side of inflation and people not thinking too much about the wave side of inflation. I mean, look at what the UAW won in the latest negotiation with the automakers. That's a lot of extra money in those consumers' pockets, right? And I think part of the, you know, when you ask consumers, are you concerned? They say, yes, I am. But it comes to the fact that you go to the grocery store and milk is more expensive. You don't maybe see the increase in your paycheck on a daily basis quite as much.

But when you do go to make these spending these choices, as you look at your savings account, like, there's some money there. I can make this happen. I do know my salary has gone up. I can make this happen. So I'm optimistic. I think I'm optimistic. There have been wage gains. There have been income gains.

And I think we're going to kind of see that play out. And is there going to be a boom? Probably not. But I'm just not convinced that we're going to see a big pullback from consumers. I think they're going to be pretty stable heading in a 2024. Well, I think you mentioned something interesting there, which is that, yes, when you have those surveys, people say that they're concerned, but they're still spending. Like, there's a disconnect between what they're worried about and what they're thinking about and their activity, which has continued, even as they were worried, very worried at the peak of inflation. It didn't really stop the behavior.

I want to ask one more question about 2023 that I felt like 2022 was the year of inventory, right? Every retailer was telling us, you know, we have an inventory problem, reducing inventory. Most of them in 2023, they knocked that out. But this year is, this has been the year of shrink. People talking about shoplifting, concerns of overall shrink. Shrink was the word I heard the most. Do you feel like retailers are reaching the end of kind of wrestling with that issue now as we head into a new year? I think that some retailers handle this issue much better than others.

And some retailers are concentrated in areas which are going through more economic disruption. So they are dealing with, in some cases, organized theft and surprisingly, haven't been prepared on how to prevent that. So shrink in terms of the biggest new story this year, which is just the theft of retail merchandise, is going to be less of a story in 2024. I think we've seen measures taken by a lot of mass retailers like tar. which aren't that obtrusive to the consumer, but they include just small steps, like having security at night at closing or having more of a presence of security,

not necessarily a lot of it, just more visible. And we have seen more of those like irritating instances of things you wouldn't expect to be under lock and key suddenly behind the glass case with the key, you have to call the clerk to help you get a pack of shaving cartridges. We've seen some more of that with retailers. But I don't think it's going to be as much of a story in this coming year.

You know, it tends to be newsworthy just because it's something scary, just as if you look at certain statistics of, you know, shoplifting over the past several decades, that's as an incidence that's down from decades ago. But we just see it much more on social media and the news. Not to say that it isn't getting bad in a few places. San Francisco is consistently pointed to as a retail, area where you're seeing much more theft and brazen theft. But overall, I just don't think it's going to have quite then useworthy feel that it did in this year.

And I think retailers are handling it better. I was curious, Toby, what are your thoughts on? Yeah, I think that's right. I'm not sure it's going to be a big issue heading in the next year. And I like what you said about the visibility, right? We see it more, so it seems to be a bigger issue. And, you know, call me skeptical, but I wonder if in large, not maybe not in large part, But if part of this was retailers using it as an excuse for some things, our margins are going down.

Oh, it's because there's shrinkage, right? We can just use that as an excuse in the earnings call and people will buy that. And so we won't have to, you know, and I'm sure it's, was it a part of it? Sure. But if you highlight that is the issue that is beyond your control. It's more of a bigger social issue. It doesn't really speak to your business specifically. you can kind of avoid blame a little bit for maybe those declining margins or make some bad decisions you made

or you can avoid outright telling people our margins are down because our costs are up and that's not changing anytime soon. So just deal with it. Right. And this is a problem that can go away, right? And so you leave investors with some optimism. You leave them thinking that, well, it's not entirely your fault. Maybe we'll cut them a little slack. And then maybe it gives you an excuse or some cover to exit some more.

markets or close some stores that you might have wanted to close anyway. So I think it was a real issue, but I think it was also a convenient opportunity for some management teams to close down some stores and to maybe avoid some blame on the earnings calls. I have heard other people express that theory as well. You're definitely not alone on that. Let's talk a little bit about the ways that consumers spent last year and what we think for next year because there's another thing that we heard over and over in retail earnings was, you know, consumer discretionary is hard hit. So like it was a good year for grocery, good year for smaller items, bad year for big ticket items, especially anything related to your house. So not a great year for Home Depot for Lowe's,

not a great year for Best Buy electronics have been down. So I'm thinking about this two ways because the Home Depot and Lowe's thing. I feel like maybe we're going to start to see people spending more on projects, but it's so tied to the housing market that I worry about it. But with electronics, so much of the spending was during the pandemic. We're now, you know, a few years out. I wonder if that's going to come back. I said, I'll start with you. What are you thinking about the big ticket spending? Yeah, I think that the big ticket spending is going to continue to be on hold. one beneficiary of that in the world of Lowe's and Home Depot are the pro contractors. They're still in demand because while bigger projects are put on hold, there's still just a dearth of new housing.

So what Home Depot's and Lows have to do now is to cater to where the demand is. And it's in those small contractors who aren't necessarily doing project work for people who own homes, but still out there working on construction projects. So they're a beneficiary of that. The other side of that is, you know, maybe you're on to something. If we're not spending on those big ticket items where we're spending, I sort of follow the semiconductor industry. And there is like in what are called super lagging edge fabs.

So fabs that make a lot of low-end chips, these are like the ones that are produced on six to eight. inch wafers, not those very, like, small four-nattometer process, cutting-edge chips you hear about, but the stuff that goes into consumer electronics, we were looking at a glut of those chips after the pandemic. And typically in a semiconductor cycle, when you have a glut, it takes two years to work off that oversupply. And guess what? We're about two years out of the peak of the pandemic. So I'm starting to see some signs in the tealies that there is going to be an uptick of demand for electronics again on the part of consumers.

Now, maybe you're reading the picture backward, right? You look for consumer demand first and then see what the supply looks like. But the fact that there is no longer like a huge amount of inventory of these low-end chips sitting with manufacturers tells me that it's good conditions for those who are now looking to maybe replace a mouse that they bought during the pandemic when they were home because it's been a couple of years. So maybe that's a trend that will see some life. in 2024.

Interesting. Toby, how are you thinking about it? I know you've taken a look at Best Buy recently. Yeah, yeah. I think all that's right on that replacement cycle, maybe coming up. Do I know, you know, personally, I was one of the households that bought multiple laptops in the pandemic as the kids were doing school from home, right? That was three years ago. Now, do you need a laptop or a tablet for each child?

if they're back in school, maybe not, but they are getting a little long on the two. So they're going to look and saying, maybe time for a new one. Let's replace one of those, right? So we're getting to that point. Whether it happens this holiday season or not, we'll see. But we're certainly getting to that point, I think.

And you noted Best Buy, their earnings report was very interesting, Deidre, because they broke down their categories. And what they said is, like, look, our big ticket items, like our appliances. One thing Best Buy has done recently has moved towards, It's your bigger kitchen and household appliances. They sell there.

That wasn't moving as much. That was down a little bit. They talked about entertainment being up, though. Right? So people were spending on things like TVs, things like gaming consoles. We saw the Adobe Analytics Report. This came out recently for Cyber Monday. Among the top products, Xbox, PlayStation, Nintendo Switches, right?

So entertainment is still being, is still receiving some spending dollars from consumers, which I find interesting. The other thing I'll note on the Home Depot Lowe's issue, I think this kind of goes back to the pandemic too. And I think it might be less of an finance issue and more of an opportunity issue. If you look at both of those companies telling us

their pro business was up more than the DIY business, what happens when you're working from home, right? You're spending more time at home. You see things. need to be done more because you're home more. You have an opportunity to do them because you're home more. So you're going to go to Home Depot, or you're going to get the stuff. You're going to fix up that little thing that you might not have noticed before.

Now you're going back to the office. You're homeless, so you see it less. And then you have less of opportunity to do that because you're spending more time commuting. Right. So I think that might be feeding into it as well, just the lack of opportunity, the lack of desire. to do some of these DIY projects is probably weighing on these retailers more so than the I don't have money to do it. I'd rather spend my money on a new PlayStation, right, because I'm more interested in entertainment right now. So I think we're partially seeing a changing consumer mix

and priorities with where they're spending their money. Interesting, because part of it too was, I think with retail, the other thing we saw is where the money got pulled and where it got pulled was toward travel and experiences and away from those big ticket items. So it's not, I'm going to get a new refrigerator. It's, I'm going to go to France. So, you know, definitely, I've been wondering when when that ends as well. And sort of dovetailing on that, where we saw the spending was grocery, beauty, wellness, anything that was sort of repeatable and really sort of like enjoyed in the immediate moment. My impression is that that continued use well on, especially even as the consumer maybe feels a little more pressure.

You know, it's the lipstick economy theory where people still want to reward themselves with the small stuff. What do you guys think about that? Yeah, I think the only thing that gets in the way of that, Diedra is 100 to 200 basis points of the Fed pulling back. So if we shift gears into reverse and the Fed eases, then I think that lipstick effect, which was made famous by Avon sales in the 60s, 70s, 80s. whenever there was a recession, those sales soared. I think people then pull back from the wellness

and beauty spends, which are still affordable, right? You can do it in small increments. It makes you feel happy. But if there's a general sense in the economy that interest rates are easing, you have a little bit more in your pocket, I think people pull away from that, but I don't see that happening anytime soon. If anything, I think the Fed maintains, and boy, there's, sales of companies that deal in beauty, as you had mentioned, when we were preparing for this podcast episode, are, you know, they're really strong right now. Yeah, absolutely. Yeah, it's Alta Beauty, to throw one out there, had a surprisingly good quarter with healthy

traffic they were talking about. You know, they did note that the average ticket went down a little bit, but the traffic was up, right? So people are going there more. Maybe you're seeing a little bit of that what you talked about also a little bit of that pullback. People aren't spending quite as much, but they're still going, right? And they're going more than any way before. So overall, it's a good thing. I'm not sure I see anything Deidre that changes that either in the next year. I don't see any major trends that would make people pull back too much. But I think that that is certainly something to look at. And that falls into that experiential

category we're talking about right i mean beauty products are stuff but it's a consumable right so it's you're buying it for that experience not for the thing to have and look at right um so it's it's definitely that sort of thing i think that's going to we're going to continue to see spending on i think well as as we wrap up let's talk about some trends that you're following for retail in 24 and the companies that are leading the way toby uh let's start with you because i know you've talked a little bit about in our notes about kind of showroom shopping, which I think we've talked about a bit. And sort of, it's really interesting to me the way that we've sort of changed how we think about the real estate of the store, because it's partly going in there

to buy stuff, but it's not, we don't buy stuff the same way we did before. And I think that's changing. What do you think? I think it is, too, there are a lot of new retailers out there where there are a store is really a place for you to come look, but you don't expect to take the product out with you right at the time. Furniture has always been this way, right? Hiring furniture. But you have some of the brands like Lovesack leaning into that. You go to the store, you try it out.

You have people who can walk. You do the various designs and the various fabrics and all that. And then you get delivered to your house sometime later. Warby Parker, another one that comes to mine, eyeglasses, right? You go in, you can do an exam there. You don't have to. But you can try on the glasses. You can see what they've got.

And then you can buy. it in store, but you don't take it. It ships from their main distribution center, right? So the store is really just a place for you to look and see. And I think we've got some companies that are embracing that. Like, consumers want to see, they want to look, they want to feel some of these things and touch them. And you can lean into that, right? And you can, with a nice combination of your online distribution network and some physical locations, have a really efficient system that works for that. And if you're looking for companies, is like, what would you want to think about for that type of shopping?

Well, not just the retailer, some of which may or may not be great businesses right now. UPS, FedEx, right? How do you get it to your house? It's the delivery. It's the logistics networks. So companies like that, I think, are going to perhaps benefit as this trend continues and maybe grows. So I'm watching a couple of trends. One of the trends that I'm really interested in is, I'll just,

call this. Everyone wants to be Lulu Lemon. So there's a movement among those who manufacture goods to be perceived as sort of an athletic brand, a technical brand. Nike is very good at this. I'll note that Under Armour, which is like a turnaround story, turnaround stock just now, their new CEO, Stephanie Lanartz, is really interested in bringing out the technical aspect of Under Armour's offering. She's focusing on footwear, so they have this great football boot, which in the United States we call a soccer cleat. It's Magnetico Pro. It's got like a $250 price point. I think more retailers are going to be involved in this trend where the manufacturer or brand, which may outsource, obviously, its footwear or other clothing, is trying to go towards a premium

price point, but give you a technical edge that makes you better. Nike and Adidas both have many marathoners who are using their latest technology to promote their shoes in this instance. So that's one trend that's really interesting to me. Let's see what happens with it. The other is, I think, you know, fast fashion is having a moment again after supply chains broke down in COVID. It seemed like the end of that fast fashion trend. But we've seen the explosion of a new business model in companies like Temu and Shian, which is confidentially filing to go public in the U.S. Temu, if you don't know this, is an online sort of version. It's a cross between the fast fashion websites and TikTok.

So these are influencer infused models, which have thousands of new products that are available every day. Only few of them are actually produced. And the sales are just amazing. TAMO is on track to do $16 billion of revenue this year globally. It was just launched in the US in late 2022. So it sprung from nothing into this business worth tens of billions. Sheehan similarly has sales that are just a huge magnitude. Even Amazon is starting to work with clothing retailers to make sure they don't get left behind

in this. So we'll see. I'm not sure the long-term economics of this business model really hold up. I'm sort of suspect. But it is a fascinating one to watch because it involves a demographic, which is young, which is already savvy with social media. To your point, Deidre is very mobile savvy and isn't really into big ticket spending. You can buy items for as low as two bucks on some of these sites. So there are little points of pleasure, I think, for the younger generation. But I just don't know about those unit economics over time. As always, people on the program may have interests in the stocks they talk about,

and the Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.