Retail stocks: Investors see 'cracks in the consumer' as early holiday shopping gets underway
The reading on the upcoming holiday shopping season so far has been mixed.
Some retailers have noted continued resilience in consumer demand as they begin to line their shelves with holiday items. At the same time, credit card spending declined in September, potentially signaling a slowdown in the fourth quarter.
"What we are seeing is cracks in the consumer," Oliver Chen, senior research analyst at TD Cowen, said on Yahoo Finance Live.
Chen pointed out several headwinds that are up against consumers.
Inflation is still moving higher, albeit at a slower rate. Consumer prices were up 0.6% month over month in August and up 3.7% compared to last year. Then there are resuming student loan payments putting household budgets under pressure.
Higher energy prices haven't helped either. On Friday, the national average gas price stood at $3.83 per gallon, per AAA, slightly off the 2023 high, though still below the recent peak of over $5 per gallon seen in 2022.
And according to Chen, resilient shoppers who are still spending are choosing to purchase travel over goods. For retailers, this has all added up to weaker traffic in September.
"What we found is that consumers are really feeling cautious," UBS analyst Jay Sole told Yahoo Finance Live. "They're worried about things like having to repay student loans, and as a result, they're thinking that they're going to pull back on spending on discretionary items like apparel, footwear, and accessories, and we think that's going to be a headwind for stock prices."
In a recent Coresight Research consumer survey, the number of respondents who said they expected their personal financial situation to be better this holiday season compared to last year dropped. In August, the percentage of those who thought their situation would be better dropped to 18.8% from 34.2% in June.
Coresight Research expects growth rates of around 1% to 1.5% in real retail sales and around 3% in nominal retail sales.
Trends still 'good' at retail leaders Costco, Walmart
Yet, some retailers are going into the holidays with an optimistic tone.
"Christmas is good," Costco (COST) CFO Richard Galanti said on the fourth quarter earnings call with investors about the retailer's early roll-out of holiday items. "Everything from decor to trees to toys, that's starting off well so far. But it's new. It's in the last few weeks."
Similarly, a few weeks ago, Walmart CEO Doug McMillon said at the Goldman Sachs Global Consumer Conference in New York City that he feels "pretty good about where the consumer is in the US."
He added that the retail giant is "encouraged by what happened going back to school. ... Normally, that means that holiday is going to be good, so I feel pretty good about the back half and our position in it."
McMillion also shook off any concerns about the overall US economy as the retail giant continues to gain share. In its second quarter results, Walmart posted same-store sales that rose 6.3%, more than the 4.04% expected, according to data from Bloomberg.
On Yahoo Finance Live, Chen said both retailers are ones to watch.
"We like market share leaders," he said. "That includes Levi's. It includes Walmart and includes Costco and also LVMH. We think they're good places to be in this environment."
As far as deals go, Sole said consumers should be on the lookout — there "absolutely" will be promotions.
"There's still too much inventory out there," he said. "I think retailers have been surprised by how slow demand has been already this year, and that's created a little bit of a build-up of inventory. ... When there's too much inventory out there, that leads to promotions and discounts because that's what retailers have to do to sell it."
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
