Retail earnings: Which chains may or may not be prepared to weather the 2023 consumer environment?

Yahoo Finance’s Brad Smith joins the Live show to discuss the latest round of retail earnings.

Video transcript

DAVE BRIGGS: What's happening with retailers? A number of retailers reporting earnings this week. Many warning of consumer weakness for the year ahead.

Yahoo Finance's Brad Smith works all the time. Fortunate he just hangs around for our show as well, buddy. We appreciate that. You're working a little OT for us, brother.

BRAD SMITH: Yeah, I'm going to be ready to take a nap in a little bit Steph Curry style, you know, at the end of this day. But for right now, we've got to focus on these retailers here. And happy birthday, by the way, Seana, as well.

SEANA SMITH: Thank you.

BRAD SMITH: Well, retail, it certainly has been a challenging quarter for the retail sector. Jharonne Martis told Yahoo Finance this week that the value proposition is key to the consumer, and the consumer will only up their wallets if they feel that they're getting a good price or a good discount. And data from the firm in collaboration with Centraprise revealed that average promotions, they rose in the month of January, which, even if helpful in churning inventory, can compress profit margins.

So who among the retail environment is best positioned to weather economic uncertainty, and which companies carry the most risk? And the answers, they've been apparent in many of these sector earnings reports as results and forecasts have poured in from companies like Kohl's, Lowe's, Walmart, and Target even, just to name a few.

So we've got two businesses, and two of them are outliers, and two of them not so much here. So the outliers to the positive side, you've got Kroger and Dollar Tree. Kroger shares, they're rising today after beating on earnings and issuing a strong forecast despite some macro headwinds.

Let's linger there for a second on Kroger here particularly because that strength that you've been able to see in the grocery category, that's even as some of those items that are getting placed in the cart, they're still costing more. But at the same time, this is such a necessity and Kroger plays a critical role in that.

And given what Walmart, one of the other if not the major grocery categorical leader or at least market-share leader here in the US, has said, they still see strength in grocery. It's just about where consumers might be trading down to some of the homegrown brands that Walmart or that Target may be citing strength in their grocery departments and aisles as well. And so within that, they still have a little bit more of that exposure to discretionary than a Kroger here.

So Kroger one of those companies that's an outlier. Dollar Tree is down despite reporting strong earnings. But beyond the share-price action, dollar stores continue to undergo some of the store expansion plans, increasing their footprint at a time when a lot of the other retailers are reevaluating their cost structure. We had discussed this earlier this week as well. Dollar/value stores, they have shown some strength in same-store sales even compared to prepandemic periods here.

So let's shift from two of the outliers to the positive side to some companies that are not doing so great, and we'll start things off with the earnings from Best Buy and Home Depot here. First things first, Best Buy falling today after reporting a downbeat full-year outlook here and zeroing in on some of the comments that came over the course of the earnings call. Corie Barry, the chief executive officer at Best Buy, said that they are expecting most comparable sales pressure in the first quarter as the year-over-year compares ease through the year.

But based on what they can see right now, they believe that calendar 2023 is going to be the bottom for the decline in tech demand. That certainly impacts them because if there's anything that we've heard from other retailers, it's weakness in the discretionary categories, and Best Buy has got a whole store of discretionary purchases there.

And let's talk about Home Depot. Home Depot shares, they fell off after reporting earnings last week. Now, the retailer offering some flat sales guidance for the year here. And one thing that was also called out by the Home Depot chairman, president, and CEO, Ted Decker, was saying that "while we expect this to be a year of moderation in demand for home improvement, we believe that the long-term underpinnings of our market remains strong" and that they're well positioned to leverage distinct competitive advantages in capitalizing on compelling growth opportunities in their space. But it still comes back to where those DIY projects are taking place within the home and then additionally how they're impacted by the broader housing market as well even among some of those larger contractor purchases too.

SEANA SMITH: Yeah, certainly it will be interesting to see what exactly we hear from Home Depot or see from Home Depot, I should say, in the coming quarters. Brad, what stuck out to me was some of the Kroger results and specifically what we saw with some of their private-label brands, and it's very consistent to what we have seen or what we have heard from the company in the past. Once again, that was an outperformer, really showing that people are trading down. They're very cost conscious. They're figuring out. They're trying to save in every single way they can, and a lot of times they're trading down to those private labels, trading down-- a lot of times those private labels are actually what I prefer, but trading down, technically speaking, in terms of some of those cheaper options. And it's paying off, or at least Kroger is able to navigate what is certainly a very challenging time.

DAVE BRIGGS: I chuckled only because it was the number-one thing that stood out to me--

SEANA SMITH: There we go. We agree.

DAVE BRIGGS: --among all these earnings reports because when you go back even earlier in the week, that's what stood out to me when you look at overall private-label earnings are up 11% in 2022. And Target saw 18% increase in the private label, and what did Kroger see? 10% increase among their private-label goods. So that is where I think all of these companies are focusing.

The one thing I can never figure out here, Brad, is, look, we know there's a shift away from goods to services, but how do we explain the insane travel people are doing and able to afford when they're making cutbacks at Walmart and Kroger and Target? And I know we're not going to talk about travel, but it's a strange dichotomy happening in this economy at the moment.

Let me ask you this. What does what we learn today mean as we get Nordstrom today and Costco? Because Costco certainly heavy on the groceries but also, I don't know about you, but Costco's discretionary, man. I mean, people go buy there and buy golf balls and--

BRAD SMITH: Yes, Kirkland.

DAVE BRIGGS: --tequila and sweatshirts. So it's not all essentials there. What do you think it means for those two?

BRAD SMITH: I'm going to attempt to tackle everything. So you mentioned travel. You mentioned buying in bulk.

DAVE BRIGGS: I mentioned way too much. Sorry, dude.

BRAD SMITH: And you mentioned a very affluent consumer. So first on the travel front. Countercyclical recovery, right? And so if some of those dollars that they typically would have spent on goods on the lavish tech that they may have been putting into their home, any time you hear on a call like Best Buy's where people may already be well positioned in the number of smart speakers or need-based tech that they already have, then there's more of a cycle turnover that we're still waiting to come. So that's on the travel side.

And then you think about the buying in bulk, which we're going to be talking about with Costco as well. Of course people are looking for those deals, looking to offset some of the price increases on a per unit basis. And what does that mean? That means buying in bulk. And particularly for Costco given the fact that they do have grocery and so closely annexed to all of the other discretionary items-- which also dovetails into how they're getting some of those discretionary things. They're going out and bidding against for inventory-- that is Banana Republic even to try and get that into their stores, and they're able to discount that that much more.

And so all of that considered-- and I didn't even get to the last thing, which is the more affluent consumer. Just keep an eye on how they're showing up in the consumer confidence data as well going forward from here.

SEANA SMITH: Yeah, certainly. Well, you made your first Costco trip recently, didn't you?

DAVE BRIGGS: It blew my mind.

SEANA SMITH: Yeah. You were very impressed.

DAVE BRIGGS: I'm going back this weekend.

SEANA SMITH: Are you?

DAVE BRIGGS: That place is incredible.

BRAD SMITH: Have you been to the liquor department there?

DAVE BRIGGS: It's like an amusement park, man.

BRAD SMITH: It's great.

DAVE BRIGGS: What?

BRAD SMITH: Really solid liquor department there and most Costcos.

SEANA SMITH: I have a feeling Dave visited it on his first trip. You didn't?

DAVE BRIGGS: I actually didn't see it.

SEANA SMITH: What? Wow. I never would have guessed that. You know, you never cease--

DAVE BRIGGS: We talk about that Uber order.

SEANA SMITH: --to surprise me. Brad, thanks so much.

And also a quick programming note. Be sure to stick around for Yahoo Finance's "After the Call" where Brad Smith and myself, we will be breaking down Costco's biggest takeaways from their earnings report and also the company's call. Don't miss that.