Weakening retail sector still has ‘pockets of sunshine,’ analyst says

Jharonne Martis, London Stock Exchange Group Director of Consumer Research, joins Yahoo Finance Live to discuss the state of the retail industry, the outlook on mall retailers, travel spending, and Amazon Prime Day.

Video transcript

- Pandemic backlogs continue to wreak havoc on the retail sector while offering an opportunity for you, the consumer. Where are we headed from here? And what's on sale? Jharrone Martis is the director of consumer at Refinitiv. She joins us now. Jharrone, nice to see you. So are we seeing supply and demand beginning to sink back up or still way out of whack?

JHARONNE MARTIS: Some retailers are faring better than others. When we look at the Refinitiv Same Store Sales index, it's evident that the consumer is still engaged. But we're definitely going to see a slowdown compared to the previous quarter. But still, the overall Same Store Sales index, which covers over 100 retailers, is expected to go grow 3.4%. Just so you know, that is above the healthy mark of 30%. Consumers are still engaged, but not just not as engaged as the previous quarter.

- And, Jharonne, Rochelle here. In terms of some of these retailers that have the heaviest amounts of inventory, who's really being weighed down by this right now? Who has to make some of these big discounts?

JHARONNE MARTIS: So the retailers that are suffering the most-- and when we look at our StarMine ARM data suggests that analysts are becoming more bearish on these retailers and are lowering their earnings estimates going forward into the second quarter are mainly the retailers that are located within the malls. We're talking about Gap, Urban Outfitters, a lot of the department stores as well. So these are the stores where consumers are not gravitating as much they were already hurting before the pandemic. And now that's even worse with all the inventory levels. But going into the second quarter, these are the retailers that analysts are more bearish on, are the mall stores.

- The one retailer that really kind of rattled the industry was of course Target mismanaging their orders. And now you get your daily patio furniture on sale update email. Julie Biel said in part because of that, she wants to stay away from the sector. Here's what she said.

JULIE BIEL: More bad news to come from retail. If you have a company as well capitalized and well managed as Target having problems with inventory, that is such bad news for the rest of the retail sector, which doesn't actually have that skill set necessarily well founded. A lot of these companies missed out on selling inventory last year. And they ordered really heavily coming into this year's back to school and holiday season. And now with consumer demand starting to get really quite soft, they're going to be stuck with a lot of inventory that they have to sell on a big discount. You're going to see margins be much softer as a result. So we're avoiding retail at any cost.

- Avoiding retail at any cost. Was Target the exception? Or were they the rule? And what do you make of that analysis?

JHARONNE MARTIS: So the StarMine ARM data is in agreement with Target in that analysts are bearish on Target. But there are still some pockets of sunshine. There are some areas where analysts are actually bullish on. And that is in the leisure, retail, and travel industry. So where analysts are revising their earnings upwards are actually companies like Marriott, MGM Resorts, Callaway Golf, and even Ulta Beauty because as consumers go back to the office and they're going out to events and even to travel, they want to look good.

So those are the names that the analysts polled by Refinitiv are still bullish on. So there is still hope. And when we look at the earnings estimates going forward, that is the sector that is expected to continue to do well. Also, consumers did book their travel way in advance, months in advance before the fuel prices went up and are expected that no matter what, inflation or not, they are still going to go with those travel plans and are going to spend money at restaurants eating out and going to events and exploring their travels.

- And, Jharonne, we have Amazon Prime Day coming up on the 12th and the 13th of July. It's also Amazon's birthday today. Back in 1994, they were founded. Under that they were Kadabra. But in terms of what you think Amazon Prime Day could really do for the retail industry, as obviously a lot of other retailers also jump on the bandwagon?

JHARONNE MARTIS: Absolutely. And we see this every year. But this year, it's going to be extra important because consumers are definitely opening up their wallets only if they find a value. And we're already seeing that. We're seeing that consumers are cutting off their Netflix subscriptions, but instead of using that money to open up memberships at Sam's Club and Costco because they want to save money at the pump. They're all about value.

And also, we're entering the back to school season. So we can see a lot of parents taking advantage of that to buy what their kids need for the back to school season. So having the right discounts and values during Prime Day is what's really going to make the consumer open up their wallets. And the other retailers that can do so accordingly will be able to benefit from that as well.

- I need some new AirPods. That's all I really care about on Prime Day. But I want to circle back to your prior answer about how consumers did book those vacations a bit ahead of time before gas prices and airline tickets and hotels went up. Because of that, there's this theory that there's going to be a lagging impact once they return from those vacations in August and September that they will have to be cutting spending as a result of the added expenditures.

JHARONNE MARTIS: Totally agree. And that's in line with the Refinitiv data that shows that consumer spending will slow down a little bit into the third quarter ahead of the holiday season. But it will pick up in the holiday season compared to the third quarter. Indeed, we will see that.

- All right. Great having you on. Jharrone Martis there, London Stock Exchange group director of consumer research. Thank you so much.