Yahoo Finance Live’s Brian Sozzi discusses the outlook for bloated inventories for retail companies like Target and Abercrombie.

Video Transcript

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JULIE HYMAN: Let's take a quick look at markets here. Almost a 1/2 hour into the trading session and we've got all three major averages not seeing any recovery, right? Like, sometimes, you have this initial sell off and then a little bit of a coming up from those levels. That ain't happening today. We're taking a leg even lower.

In the backdrop here, we have a big inventory cycle that's unfolding in the economy with major retailers like target. And Walmart warning they have far too much inventory last month. The new data from Evercore ISI shows US business inventories are now above pre-pandemic trends, bloated inventories.

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Very fine "Sozzi's Take" today.

BRIAN SOZZI: Yeah, I was looking for some positive things for you guys. So, found absolutely nothing. So, I'll stay on the negativity here.

Let's look at inventories. This is from our friend of the show, Julian Emanuel, over at Evercore ISI, looking at inventory levels from a couple of different perspectives. First chart on the screen, looking at US inventory levels. One of-- a simple chart, but the takeaway there is, Julie notes, US business inventories are above-- are above pre-pandemic trend. So, red flag.

Next chart here. He's also drilling in down-- down into Russell 1,000 consumer companies, and their inventory levels, and Julian notes, that inventories are $80 billion more than 2019. So, if you wrap all of this up, you can't say it's really any surprise.

We heard Target about a week and a 1/2 ago, two weeks ago, note their inventories are now essentially out of control and they're going to be marking goods down aggressively. You see other names on that screen with inventory far surpassing sales growth, which is a major red flag for retailers, but of course, any other company.

And now, the problem is, all these companies are going to be working these inventories down. And what do you have to do to work inventories down? Essentially, give it away, especially if you're at a retailer. And as you give this inventory away, it's going to impact your profits.

And again, you still get the sense that analysts on Wall Street don't understand this is about to happen because estimates have barely moved for this quarter. Estimates should be coming down. So, here's my take. Bottom line is, this is going to be a major problem for companies. And there I am at the board table crunching my numbers on inventory levels and getting very concerned about all of it.

JULIE HYMAN: There's a silver lining, though.

BRIAN SOZZI: Yeah, things will get better by, what? 2024?

JULIE HYMAN: No, not for the companies.

- We get deals.

JULIE HYMAN: For us.

BRIAN SOZZI: Are we go out and buy those deals?

JULIE HYMAN: Well, that's another question.

BRIAN SOZZI: I mean, the economy--

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No, look, consumer sentiment has been falling off the map. It's great to offer 70% off underwear in various stocks and home furnishings goods, but are going to go out and buy it if you are concerned about your job.

JULIE HYMAN: You always need underwear.

- If it's in the Lululemon--

BRIAN SOZZI: Do you? I mean, if you have 25 pairs, I mean, you really don't need it. I'm just saying-- I'm just saying, just keeping it real for our viewers.

- The solid rotation is 26.

BRIAN SOZZI: We're average people.