Forrester Research Retail Analyst Sucharita Kodali joins Yahoo Finance Live to discuss the retail stock rebound, inflation, consumer spending, supply chain issues, and the outlook for investors.

Video Transcript

- But first, we want to get to the markets. The retail sector appears to be bouncing back after taking a beating last week. And here to discuss is Forrester Research retail analyst Sucharita Kodali. And Sucharita, thank you for coming in again today. Just want to get your hot take on what we've seen this morning because some of the earnings are looking a bit better than those battered names, especially the bigger ones that we saw over the last week or two.

SUCHARITA KODALI: Right. Right. And even last week, some of those names that you're referring to, Walmart and Target, when you look at their 2022 numbers versus 2019, they actually weren't terrible. The bigger issue was that I word that they called out in their earnings calls. And that I think spooked a lot of investors. And I think what we're seeing with Macy's, with Nordstrom, some of these other specialty retailers, is that a lot of the macroeconomic numbers, inflation aside, when you're looking at things like wages, you're looking at unemployment rates, you're looking at savings, you're looking at things like home equity values, all of those are absolutely playing into the hands of the higher income shoppers.

And higher income shoppers are the ones that naturally are shopping right now. They're going to these higher end department stores, certainly to companies like Nordstrom and even to Macy's as well. People are absolutely going back to shopping. And I think that that's really what we're seeing in the figures here.

JULIE HYMAN: Yeah. I was going to ask that about Macy's if the Macy's customer is the same as the Nordstrom's customer, for example, Sucharita. But you know-- so I guess I'll ask that first, briefly, and then I have another question for you.

SUCHARITA KODALI: Yeah. Yeah. The Nordstrom customer and the Macy's customer you're absolutely right they are different. Some of those stores do tend to be co-located so there is probably going to be some overlap, but you're right. Nordstrom is a much, much higher income demographic. Macy's tends to be a bit more middle class. And there are no doubt some Macy's consumers that have not been positively affected by inflation.

But when you look at the macro picture, when you're looking at the fact that this is-- a lot of Macy's items, it is literally the lipstick effect, where even if a consumer is being squeezed by things like gas prices, they still want little luxuries for themselves. They are able to spend more on some of those discretionary purchases because they're not spending on things like travel or some of the larger purchases that would normally happen at this time in the year. And Macy's is absolutely a beneficiary.

Now that said, the 2022 that I just-- or the most recent, the numbers that were just released, they're basically comping 2019. So all we are talking about is recovery from the pandemic, which is fantastic. It's great. But the growth numbers are a little bit-- it's hard to just look at the growth numbers. I would discourage people from just looking at the growth numbers because all you're looking at is the recovery from the pandemic dip.

JULIE HYMAN: So let's look at some of the other numbers. And we've been watching inventories very, very carefully. And obviously, we saw big increases in inventories in many, many of these retailers. I was somewhat surprised at Macy's to only see the inventories up 17%. They pointed out that inventories are down 10% from 2019 levels, which is pretty fascinating.

So in addition to the macro risks that these retailers are facing across the board and the change in spending patterns, there also seems to be execution risk. Right. So are some of these retailers just managing through this better than others? It seemed like Walmart and Target really got caught flatfooted by change.

SUCHARITA KODALI: Well, I think that in the case of Macy's a couple of things. That was a store that always had the paradox of choice. When you would go to a Macy's, they were probably overassorted to start with. A lot of that merchandise likely didn't turn. And the stores were very, very crowded with inventory. So for them to be a little bit more conservative on that inventory now is probably not a bad thing. I'm not sure that a shopper is going to necessarily notice that because a lot of the merchandise that they're probably pulling back on are lesser known brands anyway.

The other piece about the earnings story that I don't think a lot of people recognize about Macy's is that they invested in a media network a few years ago. And that media network is actually pretty profitable and is driving-- they've announced I think that it generates well over nine figures at this point or in the nine figures at this point. And much of that is profit. So they're finding new revenue pools that their competitors don't have and a lot of players in retail don't have now. So I do think that they are pulling some metaphorical rabbits out of the hat right now.

- Well, I want to ask you about a larger trend that we've seen over the last few years where retailers are focusing on becoming more experiential with respect to their customers, trying to lure people in, especially millennials and Gen Z. And I'm just wondering how you're seeing that trend play out now because we have Kohl's, for instance, with Sephora. They're highlighting recently how they're going to expand at how many stores, I think 850 this year, something like that. I'm just wondering, as you look, are some people doing it better than others? And who's leading the way?

SUCHARITA KODALI: Right. From an experiential retailing standpoint, I think that that is going to continue to be something that we talk about for years to come. And it is going to be a balance between who can afford to do it and who can maybe work with partners or have some kind of subsidies. Kind of are there brands that you can bring in? Are there other unusual partners that you wouldn't normally think of in retail that can help to offset some of those costs?

But this notion of an improved store experience, better omnichannel, partnering with other players, that's absolutely going to continue into the future. You know, Kohl's is just one player. And I think that they stepped into those partnerships out of a position of weakness. I think that some of the strongest players to step into partnerships are some of the higher end grocers, which are more ubiquitously located. And they drive a higher number of store trips altogether. So for higher end stores to ally with some of these higher end grocers is absolutely something that I think makes sense.

JULIE HYMAN: And finally, Sucharita, talk to us about what the rest of this year could potentially look like for these retailers. Is it going to be kind of a mirror of what we've heard from this quarter or are we going to see further change in patterns?

SUCHARITA KODALI: Well, what we are seeing Julie is recovery to 2019 levels. And what that means is that we're probably not going to be seeing numbers higher than 2019 levels. So the year over year, we're still catching up to year over year 2022 over 2021, which was still kind of the-- people were still getting vaccinated at that point. So I think we'll see another strong quarter coming up.

Toward the back half of the year, I think numbers will probably be a little bit flatter because they will look more like a 2019. So with respect to that, I'm not super optimistic but, at the same time, I don't think that retail is going to fall off a cliff again the way that it did in 2020. Much of the inflation outlook is, in part, I mean there are two sides to that story. There's the supply chain side, which should be catching up.

And there's also the corporate profiteering side where I do think that you've had some suppliers that have been price gouging their retailers. And I think that retailers even like Walmart and Target, I think that what you're going to start to see is them leaning more heavily into private label. And as they lean into private label, that profiteering from the P&G's and the PepsiCo's is going to go down. So I expect that the earnings will also improve through the back half of the year. And some of those retail numbers won't quite be as soft through 2022.

JULIE HYMAN: We shall see. Sucharita, good to see you. Thanks so much for your insight. Sucharita Kodali of Forrester Research. She's a retail analyst there. Thanks again.