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Retail sales expected to slow down in 2022, 'requiring more selectivity' from investors: Analyst

D.A. Davidson Analyst Michael Baker joins Yahoo Finance Live to discuss early projections for 2022 retail sales coming off the holiday season.

Video transcript

ZACK GUZMAN: We saw it impact different names in the retail sector quite a bit differently in terms of pandemic-impacted buying pressures. How do you see that maybe shaping up next year, as maybe it shifts for maybe some of those e-commerce players back to brick and mortar? What should investors be watching for?

MICHAEL BAKER: Well, really, 2021 was all about omnichannel. It was really the omnichannel retailers that want out. Of the 14 traditional big box retailers that we cover, I think 11 outperformed the market last year. Really strong year in terms of retail sales, in fact, when holiday sales are released, and we expect a lot of companies to pre-announce this week and next week, we think it'll be a record holiday. And over-- and that will lead to a record retail sales number for the full year, by the way, on top of last year's record. So retail sales have been very strong.

We do expect that to slow a little bit in 2022. We're not looking for the same kind of growth in retail sales for a number of reasons, difficult comparisons coming off the two record years in a row, lack of stimulus, just name a few. We think people will spend a little bit more on travel and leisure, maybe not right away as we have this whole Omicron. But as that plays out maybe later in the year, we'll see a little bit more spending on services and away from goods.

So for all those reasons, we do think retail sales will slow a little bit in 2022. Still a very good year, but certainly not the growth we've seen in the last two years. And as it relates to the stocks, that, therefore, will require a little bit more selectivity. Almost everything worked last year in our big box retail group. And we don't expect it to be as easy in 2022.

AKIKO FUJITA: Michael, to what extent do the higher price points, the inflationary pressures, to what extent is that going to affect the kind of spending that we saw last year and the ability for these stores to continue to attract people in through their doors?

MICHAEL BAKER: Sure. Absolutely. So inflation, in some ways, does help retail sales, because it is additive to the sales dollars. We do expect a slowdown in units, however. And, again, some of that is a little bit less stimulus supporting the consumer wallet, as well as, if you need to spend more on groceries and the like, you're probably going to buy a little bit less discretionary goods. So another reason why we think retail sales will slow a little bit.

And we do expect margins to be impacted from those inflationary pressures. The higher input costs and the higher product costs, including supply chain issues, are sort of shared three ways among the vendor, whether that be the product vendor or the supply chain vendor, the retailer, and the customer. And we think they all share to various degrees. But the retailer certainly does share some of that, and that ends up being a margin impact.

ZACK GUZMAN: Let's talk about some of your best bets, too, though in terms of ways for investors to play this. One of those names that you do like is Ulta. And I guess I would put that in a bucket of maybe returning to normal. You got a price target of 445. Stocks now around 419. Talk to me about what you like there and maybe how it's indicative of what people should be looking out for.

MICHAEL BAKER: Sure. Well, actually, right at the end of the year, we did increase our price arc to $500 on that one. So we still see some nice upside to it. And we do see it as a reopening play. And maybe we're getting a little bit of a slowdown on that the last couple of weeks because Omicron. And we've seen some restaurant reservation trends and the things that we look at to try to track the reopening play slow a little bit in December. But we think that will be a little bit short-lived and, ultimately, people will be going back out, certainly after the winter, throughout 2022.

And so that'll help the reopening play, like Ulta. One thing that's interesting about Ulta in particular is that their makeup category hasn't really recovered. That's their biggest category. It's about 45% of sales. And that's one of the few retail categories that, in 2021, was still below where it was in 2019. A lot of categories, you know, grew from the pandemic, then even more so and were much stronger than 2019 if you look at it on a two-year basis. Makeup is one of the areas that wasn't.

And so, in a way, that's good news for Ulta. Because that means that recovery is still in front of us. So we expect there to be a little bit more Delta, if you will, in the growth rate in makeup than other retail categories. And that should be positive for Ulta.

AKIKO FUJITA: And Michael, Costco another one that you've highlighted. We have heard, at least in the most recent earnings call, Costco talk about having to maybe stock up their inventory a bit more. They talked about the delays, just like so many other businesses, with the disruptions in the supply chains. What are you looking at there in terms of their ability to ride out some of those disruptions, given that they have been able to do it so far?

MICHAEL BAKER: Sure, yeah, well, the bigger retailers who push a bigger pencil, if you will, are going to be able to ride through that better than others. That they have the ability to get product in through various means, whether it's chartering their own boats or just higher up on the list of a vendor that might have limited supply. So we do think Costco and other bigger retailers will be better off in terms of that supply chain issue. And I think that'll be borne out when we see the holiday sales results.

We will certainly involve the warehouse model, another name that we like in that space is BJs as a top idea as well, sort of benefiting from some of the same trends that Costco is. But BJ's has that added juice, in our mind, of being a company-specific turnaround story, with a new management team, that wasn't as well run in the past. But now we think is doing a better job. The stock was up 80% last year. But estimates are up almost as much, such that the valuation is still about half of Costco. So we think that one can work quite well in 2022 as well.

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