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Retail earnings: Lowe’s, Ross, Target ‘warning us not expect too much from them,’ analyst says

Refinitiv Director of Consumer Research Jharonne Martis joins Yahoo Finance Live to discuss retail earnings, the state of the consumer, consumer spending, and the outlook for inflation.

Video transcript

JULIE HYMAN: In terms of consumer and what we're watching, got to talk about retailers too. They're remaining cautious as inflation weighs on consumers. Kohl's and Lowe's out with their earnings this morning. They're both aligning on the same theme of more caution ahead.

Let's dive into the retail earnings and the state of the consumer with Jharonne Martis, Refinitiv's director of consumer research. Jharonne, good to see you. Speaking of retail, what a cool dress you have on.

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Let's talk about the caution that we're hearing, right, because it's not just Lowe's and Kohl's this morning. We got it from Home Depot. We got it from Walmart. We got it from Target. Given that the numbers right now look pretty good for some of these companies, why so much caution? What's going to go wrong as the year goes on?

JHARONNE MARTIS: As you mentioned, Julie-- good morning. Yes, it's not just Lowe's. It's also Ross. It's Target. It's a number of companies who are warning us not to expect too much from them, and this is mainly because the theme this earnings season is inflation. About 146 retailers have already reported, and over 90% have mentioned inflation during their earnings call, and they're warning us not to expect too much from them. They've been very conservative on their guidance for the first quarter.

In fact, for every positive guidance we've received, we've received seven negative guidance preannouncements, and this is the highest negative to positive-- the weakest negative-to-positive ratio that we've seen in over a year now, mainly because of the uncertainty of the macroeconomic factors and where inflation might be headed for the rest of the year. As a result, earnings expectations have been lowered for the full year for 2023 and also for the first quarter.

BRAD SMITH: For some of these companies, and especially for Target and Walmart, Jharonne-- and great to see you-- it's really about the discretionary categories that they've taken a hit in. Where do you see either further pricing mechanisms that they're going to have to roll out and that perhaps continuing to impact some of their margins just in order to clear out old inventory in the apparel, electronics, the home categories as well?

JHARONNE MARTIS: So there's different dynamics to your question, Brad. Good morning. So first off, because of the inflation, the value proposition is key to the consumer. The consumer will only open up their wallets if they feel that they're getting a good price or a good discount. So in a collaboration with Centraprise and Refinitiv discovered that the average promotion rose in the month of January, which is what helped bring in a lot of that traffic that we're telling-- that we're seeing that retailers are telling us that they saw in the month of January.

But already companies like Urban Outfitters are giving us a glimpse of February, and we're seeing that the traffic already decreased. So number one, yes, there's going to be a lot of promotions in order to move that inventory, which we're already seeing is hurting gross profit margins.

Then there's the value proposition. Consumers are trading down, and as a result, we're seeing that the dollar stores are benefiting the most. Groceries, Target, and Walmart are the main sectors that are helping offset a lot of the weakness of discretionary spending.

But then also we're seeing that the dollar stores knocked it out of the park today, and this is because the low-end consumer is gainfully employed. There's high demand for their employment. They feel good about their job security. And as a result, the dollar stores are expanding their stores in a time when a lot of the other retailers are struggling. As a result, the dollar stores posted some of the strongest same-store sales we've seen, even before prepandemic levels.

JULIE HYMAN: Yeah, which makes sense given what we're seeing from the consumer, although we are seeing those Dollar Tree shares slip a little bit. One company that sort of stands out here as not showing strength despite being, one could argue, on the value end of the spectrum is Kohl's, right? The company's same-store sales fell 6.6%. That's more than estimated. The forecast for the full year, I mean, even given that we've had a lot of negative forecasts, this one is pretty bad. $2.70 a share tops for the full year in earnings per share is what the company is expecting. Analysts are looking for $3.20.

We know Kohl's, Jharonne, has had some issues, right? The company's CEO left. It's under activist pressure. What do you see it doing to sort of get consumers back?

JHARONNE MARTIS: Well, in fact, it's interesting because this is a sector-- we've been talking about the death of the department stores for quite some time now. It's not just Kohl's. It's more of the fact that the department stores have fallen out of favor.

However, when we look deep into that sector, there is one department store that stands out of all of them, and that's Dillard's. And the reason I'm bringing up Dillard's is because this is a retailer that has smashed earnings expectations and has done much better than the other ones because it's controlled its promotions. It's been less promotional during the holidays and as a result was able to do better when it comes to margins compared to the other department stores. And also it's been able to steal a lot of-- some of that market share between Macy's and Nordstrom's as it's trying to maintain some of its exclusivity with better brands and hasn't suffered as much as the other ones.

So in order for Kohl's-- I think it's more of a department-store issue. Less promotions would definitely help a lot of the profits at these stores. But in general, they've been out of favor for some time-- in fact, even the mall stores.

And as we're seeing, it's also a very bad macroeconomic situation right now where the consumers have shifted their spending. They're moving away from discretionary and sticking to staples. As a result, it's not the best scenario for the department stores in 2023.

BRAD SMITH: And what about for stores that dabble in the business of buying in bulk? We've got a company in Costco that's going to be reporting earnings this week. Is there anything that you're seeing among consumers that would say that's exactly where they're going? They're going for the 24 pack of anything from the toilet paper all the way to the paper towels at a time to really offset or at least hedge against where they might be seeing inflationary pressures elsewhere on a per unit cost.

JHARONNE MARTIS: Absolutely. I was at Costco this weekend, and let me tell you, those lines were incredible as the consumer continues to gravitate and stick to those where value is everything for the consumer right now. They're looking for any way to save a penny.

And as a result, Costco not only does well because of the value but it really has that loyal consumer that continues to renew that membership. And because of the macroeconomic situation since the pandemic, it has consistently continued to gain more membership, and that is key, especially in this macroeconomic climate.

We're also seeing that because the value proposition is so important that the families are telling their other family members, and as a result, they're luring in also new shoppers. So they're getting word of mouth. The value proposition is there, luring in consumers. And obviously they're in strong demand. And they're giving discounts also at the pump, which we're seeing that the retailers that are offering more discounts at the pump, like Sam's, are continuously outperforming the other discounters. So as a result, Costco is well poised to do well.

JULIE HYMAN: We are looking forward to those numbers. Thanks so much for talking to us, Jharonne. Jharonne Martis is Refinitiv director of consumer research. Appreciate it.