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Retailers seeing ‘consumer spending appetite increase’ as gas prices fall: Analyst

Stifel Managing Director for Consumer & Retail sectors Mark Astrachan joins Yahoo Finance Live to discuss consumer spending, gas prices, retail hiring, and the outlook for holiday season.

Video Transcript

JULIE HYMAN: Retailers kicking off their holiday hiring and for good measure, consumer spending is on the rise, with shoppers expected to spend 9% more on holiday purchases compared to last year. That's according to a new survey out of Stifel on consumer spending. Joining us now to add some insight is Stifel's managing director for the consumer and retail sector. That is Mark Astrachan.

Good to see you, Mark. Thanks for being here. I want to start with some of these hiring plans before we really dig into the meat of the survey, which was very interesting. Target saying it's going to hire 100,000 folks. Walmart only 40,000. I mean, what can we, if anything, read into some of these plans?

MARK ASTRACHAN: Yeah, thanks. Thanks for having me, first off. I think it's probably a little bit hard to read into the plans specifically because you just don't know necessarily what the hiring levels are behind those. But I think generally speaking, it's encouraging to see at least that they're looking to hire folks and that they're actually finding folks to actually hire because if you recall over the last year or so, it's been just a lot harder to find people to come into those jobs, given where unemployment is.

And so I think they're basically trying to get what they can. I think probably the fact the numbers aren't exceedingly above where they've been in the last couple of years would suggest that they're probably in a pretty good spot at this point to be able to service the customer adequately.

And just as an aside, but I think interesting, too, remember, a lot of the folks that they're hiring are not just doing kind of front of store, but they're also doing things behind the scenes to fulfill digital orders as well, like buy online, pickup in store, buy online, pickup in parking lot as an example. So you do need more folks than you did five years ago, but I think they're probably in a decent spot at this point.

BRAD SMITH: What does that tell you, though, about some of their margin compression, perhaps, what they're expecting, based on the hiring levels that they have set forth and because they are so dramatically different from last year?

MARK ASTRACHAN: Well, I guess it's going to depend. Walmart's up 40,000, Target up 100,000. But again, kind of similar to the prior year and Walmart below. So I guess, on a net basis, that's probably better if you have fewer people versus the prior year. But this year, the margins are not just hiring of people. Of course, there's all the inflation overlying everything else that's going on. And so all these companies have just seen a massive pressure on cost.

On top of that, the slowing of general merchandise discretionary, however you want to put it, category sales. In the fiscal second quarter, kind of May, June time frame, that obviously weighed on margins there. So the expectation would be that things get better from a margin standpoint relative to where the lows were earlier in the year. So not necessarily a comment on the year on year in the holiday period, but certainly better than where we were in the July quarter, for example.

JULIE HYMAN: Yeah, and speaking of which as well, when we look at your spending survey, people in terms of their spending intentions, net discretionary spending intentions, you guys found, were up 10% in mid-September. That compares to about a 6% increase since June.

And I guess you can account for some of that with the lower gasoline prices. I mean, how do you tease out these spending intentions and account for higher prices as a part of that? In other words, if you ask someone how much more do you expect to spend, how much of their answer depends on how much more they're going to have-- do they think they're going to have to spend on the same stuff?

MARK ASTRACHAN: Yeah, it's a good question. It's not really one of those things that we get into a lot of specifics in asking folks what they think about the inflationary aspect of what they're spending relative to what they're actually spending. But inherent in that, obviously, is at least some level of inflationary pressure that goes into it. But I think, really, the high level just suggests that the consumer, regardless of what we're seeing and debating from a market and macro standpoint, that the consumer is actually feeling a little bit more robust or less influenced by kind of some of those higher level items.

And to your point, I think the gas prices, it's really hard to kind of overstate what the impact was on higher prices in early June and, obviously, lower prices on a relative basis from there. And we asked the question on just how much impact you're seeing from gas prices on spending. And it's still inflated relative to historical levels. 60% of our respondents say that they're expecting some impact from their spending on gas prices, but that's down 10 points from where we were in June.

And obviously, gas prices are down materially since June, still up about, I think, 15% or so year on year. So I think that's kind of what you're seeing here in terms of the overall spending. The lower gas prices really is helping the consumer kind of thinking about that.

And the holiday spending kind of coupled with asking on back to school spending that we started in, I think, late July or early August, show that you're actually seeing two improving spending intentions on just back to school, but also on holiday, that those levels in terms of where back to school spending ended, which was down a couple of points versus a year ago, is much better than down high single digits, where we were in early August when we started asking that question.

So I think you're kind of seeing the consumer spending appetite increases. Gas prices, in particular, come down. And then they're just dealing with inflation as they can. But there's not a lot you can do.

BRAD SMITH: What type of divide in that spending and tension are you seeing among different income brackets, perhaps, and especially as we've seen a relative resiliency in some of the higher income spenders versus the rest of the market, the rest of the economy, and consumers that are trying to exactly determine where they can still spend on discretionary things versus kind of pulling it back in entirety. And is that starting to trickle into the higher income brackets as well?

MARK ASTRACHAN: Yeah, it's actually really, really fascinating. So we take the income levels and kind of look at those questions that we ask-- a lot of the questions, but the very high level of spending, the high level of back to school and holiday. And what's really fascinating is, it's been ongoing for a while that those earning less than 75,000 per year have in absolute terms said they're going to spend less on a year on year basis. And that got worse as we went through spring and early summer, peaked or troughed in June from higher gas prices and has gotten better.

So if you take a look at the most recent survey, those consumers, again, those earning less than 75,000 per year, say they're going to spend 17% less versus a year ago versus the overall 10% number that you said. So it obviously tells you how significantly up the spending intentions are for those earning more than that.

And if you take a look at the back to school and holiday, the same dynamics play out where those earning less than 75,000 are going to spend less. But interestingly, holiday spending intentions were actually higher relative to overall spending in each income level, including those lower income consumers.

So suggesting that the lower income consumers are going to spend less year on year, but they're actually spending less than just the overall-- or I should say, they're spending more than the overall discretionary spending. So they're still planning on spending more just in absolute terms on holiday. So somewhat encouraging there.

And I'll just add, too, that if you look at that under 75,000 level that's, as I said, gotten better since June, I think that's probably the important takeaway here that that lower income consumer is feeling a little less pressure right now because the gas prices are.

JULIE HYMAN: Where are all these people going to spend their money, Mark? Just real quickly, what's your pick going into the holiday season?

MARK ASTRACHAN: I'm not sure I have one. But I think maybe broader strokes here, kind of punting the question, discretionary spending has obviously been pretty weak in the first part of this year. And so I think you're going to see that those categories that were most weak probably come back a little bit more as we head into holiday.

BRAD SMITH: Stifel managing director Mark Astrachan joining us here today. Thanks so much for the survey, the insights, and breaking this down for us. Appreciate it.