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Retail sales decline indicates the consumer is ‘becoming less healthy’: Analyst

Barclays Consumer Discretionary Analyst Adrienne Yih joins Yahoo Finance Live to discuss the latest retail sales data and what it says about the consumer, the outlook for luxury retail, and home retailer stocks to watch in 2023.

Video Transcript

DAVE BRIGGS: Retail sales declining by 1.1% the month of December, marking the largest monthly drop in all of 2022 and perhaps flashing another sign that the consumer is slowing down spending. Here to discuss is Barclay's consumer discretionary analyst Adrienne Yih. Nice to see you. So let's talk about those retail sales. What do they portend for the entire retail sector as we move into '23?

ADRIENNE YIH: That the consumer is getting less healthy. In 2022, I think what we really saw was the sub $70,000 household category, particularly in the $50,000 household income category, really pull back on spend. If you think about it, in that household segment, about 75% to 80% of their budget is spent on essentials, right, things to just live. So not a lot of discretionary spend.

What we saw during holiday is this income bracket, as you-- what we call wallet creep kind of creeping up to 100, 125, the $150,000 household income. The top echelon of the US economy, they're starting to pull back on a pretty significant basis. And they're the ones that have discretionary spending power.

SEANA SMITH: So Adrienne--

ADRIENNE YIH: So it does not bode well for 2023.

SEANA SMITH: Yeah, apologies for jumping in there. How much weaker, then, do you think this landscape could potentially get over the next several months?

ADRIENNE YIH: So, tough question, but what I will say is, let's put it into perspective. Half of the household incomes in the US are 70,000 below. And we talked about those already having pulled back on spending. The other half of them, 50%, are 70,000 and above. And they represent 65% of consumption in the US. So if we do see this, if we're correct and we do see this wallet creep and the indications of a sloppy holiday, right, manifesting into kind of spring selling activity.

And by the way, there are no more promotions. You're going to see the promotions dry up. And that was a huge catalyst for people to convert and to spend. So if there's pent-up demand and you see people at the higher income brackets who have the wherewithal to spend, as you just had the Microsoft layoffs-- we hear about corporate level layoffs, white collar layoffs, almost on a daily basis now.

And I think that negative mind and mental impact, we saw this in the 2008 recession. It wasn't about those who could spend. They just stopped spending because you see to your left and to your right, that there's layoffs going on. And that causes kind of the mentality and the psyche of the consumer to worsen.

DAVE BRIGGS: Yeah, one of the many things people have cut back on spending, furniture in this retail sales, and that has to do with Restoration Hardware, a stock you cover. Brian Sozzi and Julie Hyman spoke to their CEO this morning in Davos. Here's what she had to say regarding the cycle between home buying and remodeling your home. Listen.

LAURA ALBER: There's people who are still really in the process of doing these projects, whether it's a kitchen or a bath remodel. And so usually the cycle goes, you buy a home, you do some remodel, and then you buy the furnishings that go with. And the minute you take everything out of a kitchen or out of a closet or out of a room to redo it and put it back in, you realize that you might need something to be replaced.

DAVE BRIGGS: I said RH-- I meant Williams-Sonoma. We will get to RH shortly. But that was an interesting revelation, as we look at how these cycles impact one another. You downgraded Williams-Sonoma. What has surprised you, as that stock continues to perform thus far this year?

ADRIENNE YIH: Yes, it does surprise us. What I would say is we have a case in retail of what we call the rising laggards, right? So remember, Williams-Sonoma was down about 32% last year. RH was down 50%. Williams-Sonoma is now up 9% year to date, and RH is up about 16%. There are even further laggards like Peloton and Stitch Fix that are up meaningfully more than that.

So I think what we're seeing here is in the absence of information, right-- and the next data point of information is going to be the 2023 guidance for these retailers in February, March, and April. And I think in the absence of that, people are trying to play this beta trade. Like, what if things are actually better? What if freight is actually a net positive to the margins?

The reason that we downgraded the home furnishing space is what Laura Alber was saying-- and huge props to Williams-Sonoma for making it through this entire period of time with such strong margins. But the fact of the matter is, last third quarter was their first demand comp that was slightly negative, right? Their actual comp, recognized revenue was up 7%.

And through this entirety of the pandemic, this is their first but for, 1Q '20, this is their first kind of slight break. And there is a lag period between the time that you see all of these macro factors-- slowing home sales, you know, all those different macro factors that impact the home sales. So there's about a six to nine-month lag. And so that demand comp is really what we keyed in on.

SEANA SMITH: And Adrienne, I knew you were saying promotion you expect to start drying up. What about inventory levels? I guess more so, what does that tell us about inventory levels? Are they expected to significantly improve? And how do you expect executives to manage those inventory levels, following what's happened over the last two years?

ADRIENNE YIH: That's a great question. And for all of the other apparel categories, the discretionary categories, we are seeing that the third quarter was that inflection in inventory. Inventory started to grow slower. The only two retailers that we follow that did not have that phenomenon happen, their inventory spread, right, sales dollar growth relative to inventory dollar growth, are Williams-Sonoma and RH, in large part because their sales slowed, right? So if sales slows immediately, you kind of slow down your inventory over the course of six months.

So that's really for the rest of retail, we think that they're going to be starting in a very-- like, apparel, they're going to start in a very clean inventory position in 2023. But it seems to be at the margin, getting worse for the home furnishings guys due to sales slowing, right?

DAVE BRIGGS: Indeed. Adrienne Yih, great perspective there. Thanks so much. Appreciate that.