Retailers will take a ‘major margin hit’ from discounts: Analyst

Bernstein Analyst Aneesha Sherman joins Yahoo Finance Live to discuss the record-breaking online Black Friday sales, inflation, excess inventory, consumer trends, and the outlook for retailers.

Video Transcript

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BRAD SMITH: Well, shoppers spent a record $9.12 billion online despite record inflation, that's according to data from Adobe. And deals are expected to continue through the holiday with Cyber Monday shopping currently underway as retailers look to clear house. Joining now with more insight into the retail landscape is Bernstein's senior analyst, Aneesha Sherman. Great to have you here with us today. From your perspective, do you believe that Black Friday, Cyber Monday are enough to get companies and their balance sheets into the black given that this is still going to be a heavy promotional period this year?

ANEESHA SHERMAN: I think it's going to take a toll but I don't think it's going to be enough to clear the excess inventory they have. So you know, I think it takes a toll on their gross margins, I think it gets them in the black as far as you know, kind of higher sales and higher absolute profits, but they're going to take a major margin hit from the clearance that they're doing over this weekend and over the coming weeks.

But more importantly, I mean, one of the biggest concerns these last six months has been on inventory levels, where everybody is running at record high inventory levels. And I don't think that clears as a result of Black Friday weekend. I don't even think it will clear in the next kind of couple of weeks. I think most brands and retailers will start 2023 with an inflated inventory position, which will take another quarter or two to clear properly.

BRIAN SOZZI: Aneesha, well, one of those brands with an inflated inventory position into next year, will that be Nike? I went to a lot of stores over the weekend, not only was Nike stuff discounted and very prominent but there seemed to be a lot of it everywhere.

ANEESHA SHERMAN: Yes, Nike has been doing aggressive clearance of product over the last month or so and especially into Black Friday. It's primarily apparel product and even within that it's primarily seasonal apparel, so think about you know, more summer and fall gear that they are selling off on clearance because they don't expect it to sell full price going into kind of the winter and the spring. What the company has also said is they have a lot of new stuff coming in. So fresh product that they want to put out on the shelves starting in the new year, which they can't do yet because the shelves are filled with old product. So they're trying to clear as much as possible the old product.

They have guided to a big gross margin haircut this quarter as a result of all that clearance but their view is better to clear it and take the margin hit and then start clean, rather than let it linger on the balance sheets for another six months. So I think that's the right approach. But I also think it's not going to all clear this holiday season, and they will have a little bit leftover to whittle down over the next few months but will be in a much better position than many other brands because they are taking such an aggressive stance to clearing it over the holiday season.

JULIE HYMAN: Aneesha, it's Julie here. The likes of Nike has also taken a more diversified approach to manufacturing, right? Given the pandemic, they tried to make adjustments, other manufacturers have too. I'm curious, with the latest news out of China about the protests there, and about their ongoing difficulty with reopening, are there any implications for apparel companies or other manufacturers as a result of what's going on?

ANEESHA SHERMAN: Over the last year, we've had so many different restrictions and lockdowns in China, and what many of the manufacturing brands, apparel as well as other kind of hard goods, consumer products have done, is protect their manufacturing facilities by kind of isolating workers, testing them, keeping them within the facility when there is a citywide lockdown to be able to continue running the factories. I think they will take-- that I expect factories to take some of those same measures to avoid vast factory shutdowns in China.

But for Nike specifically, I mean, China is a major region but the bulk of their footwear, 50% of their footwear is made in Vietnam. So from a footwear perspective, the bulk of the volume is coming from other markets. And then apparel, though a good chunk of it is made in China, about 20%, apparel is much more easily diversified, it's less R&D intensive, it's easier to substitute other producers. So I don't think it will lead to a huge supply crunch for Nike specifically.

BRAD SMITH: Aneesha, kind of supplementing our discussion that we had with Scott Cutler from StockX, and even one that we had a few weeks back with Farfetch and where they're going to continue to move forward there and-- excuse me, GOAT's Eddy Lu-- with regard to the resale market and what we may see this holiday season, it's not so much about where there's going to be discounting perhaps, but where you might see prices that are relatively lower for same products on a year over year basis where some of the resellers just can't move through the inventory that they've listed on those platforms. Is there anything that you're seeing that sticks out within that resale market right now this holiday season?

ANEESHA SHERMAN: Yeah, I think we'll see exactly that because you know, as we've come off a year of really high pent-up demand where people have been spending on product, you know, let's think about a year ago, right at the end of 2021, people were gearing up for a super strong 2022, they were buying at a much higher rate in that holiday season. This year, people have said they're going to cut back in holiday spend. So I think that goes for gifting as well. So if you're talking about the resale market as a source for both collectibles as well as gifting, I think that demand does take a toll relative to where we were a year ago.

BRIAN SOZZI: Aneesha, one brand that may not be seeing cutbacks is Lululemon. I visited a couple of Lululemon stores as well over the weekend, the place was packed. And there were really no discounts and I'm not tracking pricing on products anymore, it's not part of my gig here but I'm just-- the prices felt much higher year-over-year.

ANEESHA SHERMAN: Well, we've seen data in both directions. So when we look at we track pricing and promotions, and Lululemon has always historically had a much lower markdown rate than most or all of its competitors. The markdown rate, the percentage of products marked down hovers around sort of 10%, maybe going into the low teens but as a contrast, Nike is over 40% at the moment. Adidas is over 40% at the moment. So most other brands are discounting very heavily. Lululemon is still in the kind of low-double digits range.

On the other hand, they're participating in Black Friday sales. I was surprised to see some of their newer lines golf, tennis, shoes, also as part of that Black Friday sale event despite their having said that the supply of those products was especially tight this year. So you know, they do have an inventory situation, their inventory is incredibly high, they're trying to hold on to it. And rather than put 40% of it up for sale, they're trying to kind of drip-feed it over the next six months to preserve their margins. But they are-- they're part of the problem as well, as they are in Black Friday, their new products are in Black Friday. So they are going to see a gross margin hit as a result of that.

BRAD SMITH: So when I think about a brand like a Lululemon, and the pricing or even a Nike and some of the pricing that we've seen there, it all comes as there's been a shift towards how they're really putting together their business in this direct-to-consumer environment as well, and deciding what of that product goes out to some of the other wholesale partners. For Lululemon, it's been largely direct-to-consumer but for the pricing, have you started to see some of that pushback on pricing from consumers? And honestly, here I mean, we were just talking about the sweaters being way too expensive just out of this world expensive for Lululemon. Are you starting to see both consumers push back on pricing or even the direct-to-consumer strategy be an inventory hedge at a time like this for some of those companies?

ANEESHA SHERMAN: So in terms of pricing, I mean, we've seen bifurcated demand this year. We've seen at the same time inflation pressuring lower-income from consumers, while simultaneously pent-up demand is fueling higher-income spend. And both those trends have played out over the course of this year. And so we've seen it in the results, right? Lower-income value retailers have posted comp declines and misses, while some of the mainstream and higher-end brands have posted double-digit growth in North America, confirmed.

So that bifurcation I think is starting to compress. We look at the consumer data, we did a survey of more than 3,000 consumers a few weeks ago, and we saw a change in tone versus when we did it a year ago in terms of people cutting back more into holiday, cutting back more into 2023. And it's not just the lower-end shoppers, it's more middle-income and kind of slightly going into the higher-income brackets as well.

So I think we haven't seen a resistance to price increases yet because those mainstream and higher-income consumers have been more than willing to absorb it. But that may be starting to change. And we have heard from some brands that they're pausing price increases in 2023 versus you know, kind of holding their position but not further increases because of their anticipation of a slightly softer consumer.

But on DTC, I think you're right, I think DTC is a hedge against promotions. If you don't have a lot of product that's sitting with wholesale partners, you're not going to see a ton of product marked down in the market because you have control over your inventory. And Lululemon is a great example of that, where they've made the decision to hold on to their inventory, to sell it over a longer period of time, to carry a higher inventory balance but reduce the number of markdowns in the market and you can only make that kind of decision if you have an almost or completely DTC business and you are in control of all of that inventory.

BRIAN SOZZI: A little nugget for your research, Aneesha, the guys' golf stuff, it just fits too small. I cannot bomb drives in their shirts. I have tried. I just can't do it. Bernstein senior analyst, Aneesha Sherman, always good to see you. We'll talk to you soon.