Retail sales: Consumers were ‘spooked’ by inflation, analyst says

Wall Street Horizon VP of Research Christine Short joins Yahoo Finance Live to discuss December retail sales data and the outlook for retail earnings.

Video Transcript

AKIKO FUJITA: We've got Christine Short, Wall Street Horizon VP of Research. Christine, it's great to talk to you to break down the data we got out this morning. What do you make of this print that we got in December. Are these higher prices finally starting to catch up with consumers?

CHRISTINE SHORT: It would appear so. I mean, like you pointed out, we were already expecting lower numbers than we saw in December. You know, most estimates had December retail sales around flat, maybe slightly negative. And that would have continued the trend that we started to see in November. Like you just said, November even got revised downward. But this, I think, was a shock because of how off the estimates were. So it's actually much lower than we were anticipating in December.

And like Zach pointed out, we had a lot of different kind of sentiment around how consumers are doing. So in December, it sounded like it was a great holiday shopping season. Maybe not a record, but considering what we were all anticipating starting in July with supply chain disruptions and inflation, it felt like we had gotten through that. We did have a couple of months where consumer sentiment was down, specifically November. But then you have consumer sentiment index popped up in December. But this morning, now we're seeing the prelim numbers for January, and we're back down to almost the second lowest reading in 10 years.

So it's confusing. It's unsure if consumers were just hearing about inflation and sort of spooked by it earlier in the summer or in the fall. But now I think they're really feeling it, and so I think you're going to see a continuation of this pattern. This, for me, solidifies that inflation is impacting consumers, and then you have this natural pause at the beginning of the year, anyhow, with spending. Consumers kind of taking a breather, they've spent money over the holidays. And if you look at some of the different categories you mentioned, online spending down, home furnishing, which was just on fire all of last year and really, the last couple of years. Restaurants and bars, that's obviously related to the COVID surge as well.

And so there's some categories that were really doing well that we're just seeing tank now. The only two that saw increases were miscellaneous stores, so things that otherwise aren't categorized like florists, art supply shops, pet stores, there's about a few dozen more of those, and building materials and garden centers. So expect on the retail side when earnings come out next month your Home Depots, your Lowe's to probably continue to do well. But overall, the sector expecting pretty muted earnings for the Q4 season.

ZACK GUZMAN: Yeah. And that's-- I mean, I guess, that's kind of the thing looking forward, right? If maybe retail sales didn't deliver over the holiday season, you wonder if any of those retailers have been playing catch up, what it might do for pricing as we move into the first quarter of this year. Just kind of trying to offload maybe some of the inventory that that didn't come in time, or maybe they over-ordered on. So, I mean, how does that maybe start to impact earnings as we look ahead for some of these retailers that were really, I guess, banking on it being strong?

CHRISTINE SHORT: Yeah, I think you have to keep in mind that, year over year, earnings growth is going to normalize. We're seeing that right now for Q4. Numbers are still very high for the quarter, we're at about 22% earnings growth. But that's moderating a bit, and that's normal. It's meant to normalize. Like some of those numbers we saw in the year ago period were quite high. So historically speaking, earnings will still be high. But if you look at the 2022 numbers, those do begin to moderate. Consumer discretionary is actually one of the laggards this quarter, and will continue to be in the first half of the year.

But if you look at earnings growth of about 1.5% for consumer discretionary, revenue growth is still at about 11.8%, so clearly that's a pricing issue. It's everything that a lot of discretionary names have complained about so far in their earnings releases, which are labor tightening, increased costs. And so that seems to be impacting certainly the bottom line, although revenues still look strong on a year-over-year basis.

AKIKO FUJITA: Yeah. On that front, Christine, if you think about the previous quarter, we did still see that divide between the big box retailers and then some of the smaller names, in terms of their ability to cushion some of the costs instead of passing it down to consumers. Is this the quarter where we're going to finally start to see even the bigger names say, we're going to have to increase prices?

CHRISTINE SHORT: Yeah, you know, it depends. Like you said, sure, Walmart, Target, they really manage inventories really well over the holiday. They weren't-- you know, they didn't have to increase costs, but you might start to see that breakdown in 2022. Certainly, the smaller names already have felt that impact in the second half of 2021. But if you look ahead at estimates for some of the big box retailers, those start to moderate as well. So I think you're going to see that commentary well represented in Q4 estimate-- or Q4 results, and for estimates in 2022.

ZACK GUZMAN: And lastly, I mean, you use the word confusing, and I feel like that's a good way to of sum all this up. And if you are the Fed watching some of this data and basing your decisions off some of this data, confusing isn't really what you want when you're trying to project out what things are going to look like. So, I mean, how much harder does it make the Fed's job? Of course, they've been leaning more into, I guess, the strength they're still seeing on the labor front. Inflation though, increasingly, when you add everything up, very difficult to predict. So, I mean, how do you see them navigating that as we try and gauge whether or not three interest rate hikes are actually what we should be expecting?

CHRISTINE SHORT: Well, it sounds like they're pretty committed thus far, but you're right. Is inflation already moderating? I think that's what the Biden administration is trying to say from the latest CPI reading of up 0.5%. Yes, year over year, it's a 7% increase. That's the number everyone's focused on, highest in four decades. But we have seen a tick down month over month from what we saw in October, November, which were about 0.9%, 0.8% increases month over month. Now we're down to 0.5, so is it naturally tapering off? Perhaps.

But, you know, if we are talking specifically about the sectors that benefit from interest-rate gains, consumer discretionary typically is one of them just because environment and what you're raising rates is usually, like you said, great labor market, high growth. And so that tends to help the discretionary names, people are out there buying. But now you have this added impact on inflation, so I think it makes their job very challenging, especially because we don't know what we're going to see in the first half of the year. And our interest-- is inflation naturally already tapering? I'm not sure that there's evidence of that yet.

But right now, it looks like everyone's predicting a March hike and that's come up. I mean, I don't know about Jamie Dimon's prediction of six to seven. That sounds a little exaggerated. I've-- at most, I've heard four. But yeah, they're going to have to watch the situation closely because it is a bit of a balance.