Retail headwinds: How to play slowing consumer spending

With interest rates on the rise and savings for many Americans starting to dwindle, there is a lot for retailers to be concerned about. CFRA Analyst Zachary Warring says based on what he's hearing "low-to-middle income consumers are kind of spent through that excess savings that they built up since the pandemic, while high-income consumers still have a significant chunk of that left." Watch the video above to find out which stocks Warring is recommending given that sort of consumer spending environment.

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Video Transcript

BRAD SMITH: So for apparel and footwear and where consumers are going to be looking for discounts in the retailers that could potentially impact the most, which ones are perhaps the most at risk in that effort?

ZACHARY WARRING: Yeah. So a couple economists and analysts have come out and said, you know, they think that low to middle-income consumers are kind of spent through that excess savings that they built up since the pandemic while high-income consumers still have a significant chunk of that left. So we like companies that cater to high-income consumers. And we like companies that may benefit from a trade down from the middle-income consumer, companies like Ross and TJ Maxx, and then we like Lululemon as kind of a high-income consumer brand.

SEANA SMITH: When you talk about some of the areas, we mentioned the credit card delinquencies, we mentioned the fact that we have higher rates. When we talk about the shift that you expect to see in the consumer, what are some of the other factors that you think are going to be driving consumers to pull back on some of those spending plans?

ZACHARY WARRING: Yeah. So I mean, I think the last few years, the consumer obviously had a lot of money. So there was a little bit of pull for demand. So a lot of consumers bought more shoes and clothes than they needed probably. So I think that's probably going to be one of the things that's a headwind.

Obviously, you've seen that growth decelerate in the first eight months of this year. You know, I think under 2% growth for retail in general and then under 2% for apparel and footwear and clothing and clothing accessories stores. So we expect it to just kind of continue along that slow decline.

Like we said, we don't think it's Armageddon here. We just think, you know, maybe flat to down off of two really successful years in 2021 and 2022.

BRAD SMITH: And so going into 2024, where do you expect that consumer sentiments to ultimately net out? Are we looking at and thinking about a consumer that is going to continue some of perhaps the retail therapy that typically takes place in some pockets, where they're buying into like little luxuries here and there? Or is this a consumer that is going to continue buying into experiences and says, you know what, for the goods, I'm all set, I'm good?

ZACHARY WARRING: Yeah. I mean, I think early, that'll probably be the strategy. Obviously, services and entertainment has done really well the last two years because of the pull forward demand that we saw during the pandemic. I just-- I don't think that's going to change immediately here. The consumer doesn't have a lot to be excited about obviously. They do have wages up. And it's a very low unemployment rate. So that's obviously good for the consumer and these apparel and footwear retailers.

But, you know, we just think over the next 12 months, it'll probably just be a slow grind. We don't think anything's going to break and the economy's going to go into a deep recession. But we do see a slowdown deceleration.