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Inflation creating a ‘bifurcation’ among retailers, analyst says

Bernstein Senior Analyst Aneesha Sherman joins Yahoo Finance Live to discuss the outlook for retail stocks, consumer spending amid inflation, and apparel sales.

Video transcript

- Switching gears here, we've got to talk retail on the day. Retail is under pressure after seeing a steep reversal in May, with record inflation causing a pullback for consumers in turn producing higher inventories for companies. Joining us now to discuss the outlook for retail is Bernstein senior analyst Aneesha Sherman.

Aneesha, great to have you here with us. Help us break this down a little bit, especially given some of the retail readings that we've been tracking. What does this shape up for the current quarter that we're in and the results that are set to start rolling in over the summer, as well?

ANEESHA SHERMAN: Yeah, it's been a bit of a mystery this year because, overall, the numbers show growth. So the apparel retail sector grew high single digits in March, high single digits in April, and high single digits even in May. And the March, April data was on top of triple-digit growth last year. So at a topdown level, it looks great, right? But there is a bifurcation in there, and we're seeing the more discounted concepts being hit much harder. And we've seen the results from Target and [INAUDIBLE] talking about the low-income consumer pulling back.

But at the same time, if we talk to companies like Tapestry that owns the Coach brand or Lululemon that target the 100K plus affluent consumer, their demand remains robust. So we're seeing that bifurcation. And I think we're going to continue to see that in the current quarter. I think the question is, if we continue to see high inflation and if unemployment starts picking up, then does that bifurcation blend? And so do we start seeing a pullback at more middle income and slightly higher income points, at which case-- at which point it starts to impact the broader sector, and not just the value players.

- Aneesha, are there companies in your coverage universe that you think are not well prepared to withstand a recession?

ANEESHA SHERMAN: Yeah, so in my coverage universe, there's some recession resistant companies, like, you know, [INAUDIBLE]. I think will do well in a recession. But I think some of the discretionary brands, so even the bigger brands, like someone like a Lululemon or someone like a Nike, if there is a large-scale recession that affects the middle income and kind of across the board consumers, they will take a little bit of a hit. But I think what we see in recessions is that big brands and big retail concepts tend to consolidate share.

And so I think the bigger players are more defensive. The more-- the bigger risks to me are the small and medium size, both in retail and in terms of brands, because they will lose disproportionate amounts of share and they don't have the operating leverage or the cash balance to get through negative sales numbers without having to close stores and make other more drastic cuts.

- Has the pricing power that these companies exhibited within their most recent growth phase, has that evaporated?

ANEESHA SHERMAN: So far, not at all. So on the higher end, all of the brands and retailers almost are taking price up. So we're seeing that from luxury downward into premium downward into mainstream. Everybody is talking about price raises. They're doing it under the umbrella of kind of the whole industry taking price. And with inflation going up, that's a good way to pass on the cost to the consumer without the consumer pushing back.

Even at the low end, we are seeing some retailers able to take price. TJX is a good example of this, where they've been able to take price on, again, on their more higher end assortment that targets the more affluent consumer. So if that affluent consumer starts looking a little less healthy financially in the next few months, then that outlook will change completely. But so far, pricing power has held up.

- How do you explain the strength? You mentioned Tapestry. Is that a function of folks traveling again and going back to the office?

ANEESHA SHERMAN: Yes, absolutely. So this tradeoff that we hear about between things and experiences, that does not apply to apparel and accessories. Apparel and accessories is driven by experiences and occasions. If you're going to a wedding, if you're going on a trip, you're going to buy an outfit and shoes and a handbag to go with that. So the huge surge in travel that we're seeing and in occasions and even going back to work has led to a surge in buying, which helps Tapestry. They sell handbags. It also helps the shoe and apparel-- shoe and apparel brands.

- Nike is an international company. Adidas is an international company. Lululemon, international company. How much is an impending recession not just in the US, but even internationally, as well, how much is that a headwind risk that they need to account for right now?

ANEESHA SHERMAN: That's a great question. I think actually the risks are going to be staggered. So at the moment, all of the companies you named are suffering huge declines in China, right, because that market is locked down. But as we're going to see China coming back, as we're going to see that spend surging, some pent-up demand unleashing towards the back half of the year, we may see more pressure in North America. So I think that being international, particularly having exposure to China and Asia, is going to be defensive over the next year because the impacts are going to be staggered between North America and East Asia.

- Aneesha Sherman, Bernstein senior analyst, always good to see you. Have a great weekend.