Are consumers truly resilient? What retail revenues say

Many big retailers will release their earnings reports next week, including Macy's (M) and Best Buy (BBY). With continued inflation and uncertainty around the Federal Reserve's next monetary policy decision, Wall Street is turning toward other factors like the strength of the US consumer to better understand economic conditions.

BMO Capital Markets Managing Director Simeon Siegel joins Yahoo Finance to discuss upcoming retail earnings and the state of the American consumer during economic headwinds.

Siegel elaborates on the state of the consumer:
"It sounds pretty scary, so if the question is whether the consumer is healthy or not, I don't know. If the question is whether the consumer is spending or not, the revenues are saying they are. And so I know there's this perception that because of inflation on staple items, people aren't buying discretionary, but I'm not seeing that in the results... We'll see TJX (TJX) give us a very good snapshot on people that are specifically looking for value, but then we'll see Birkenstock (BIRK), on the other hand, where people are buying, perhaps paying more comfortable spending on."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

SEANA SMITH: The resilient consumer is one of the big factors that has helped the economy avoid a recession. So far this earnings season key retailers though have cautioned about weakening sales trends, inflation still being a problem and pickier customers. While investors we are going to get a closer look at some of these spending trends next week with Lowe's Urban Outfitters TJX companies and Best Buy all scheduled to report.

Let's talk about what we could expect with Simeon Siegel. He's BMO Capital Markets managing director. Simeon, it's good to see you here. So when we think about the companies that have reported so far, there has been a trend of consumers once again trading down. They are clearly being hit by the fact that inflation has proven to be even stickier than many forecasters had anticipated up until this point. What does that mean for some of these retailers that are set to report next week?

SIMEON SIEGEL: Hey, Seana, great to see you. By the way, you're reminding me how busy and painful next week is going to be. Thank you. So [INAUDIBLE]--

SEANA SMITH: Just a friendly reminder ahead of the weekend. It's a great Friday reminder, that's great. So I think what is very interesting right now is there's an incredible amount of nuance at the company level. And in theory, that's a very encouraging thing if you're a stock picker. The problem is we can look at the market. And we can see what happened yesterday as an example. And there is so much of the stock trading dynamic, which is just market driven right now.

And so I'm looking at some of these businesses and saying, you know what? For the first time since the pandemic, companies actually have to execute. Well, you're watching certain companies drive revenues up, certain ones drive revenues down. You're watching certain companies see material gross margin expansion, others a lot less. And so that's really comforting. The problem is right now all my stocks are up.

And so when I look across the board, it's going to be very interesting next week seeing what matters, what people want to focus on. And I think that's your question. And so what I'm going to keep an eye on is the fact that so far my companies on average have seen revenues grow mid-single digits. But they've seen gross margins expand by 200 basis points. There's still this benefit from supply chain.

And so this is a very important quality of earnings story to keep in mind.

BRAD SMITH: When would you describe-- how would you describe the consumer amid this earnings season as well, Simeon? I mean, when you think about where the consumer is still willing to buy in at full prices versus where they're looking for deals and looking for value hacks.

SIMEON SIEGEL: Yeah. It's such an important question because we're all hearing the consumer-- listen, it sounds pretty scary. So if the question is whether consumer is healthy or not, I don't know. If the question is whether the consumer is spending or not, well, the revenues are saying they are. And so I know there's this perception that because of inflation on staple items, people aren't buying discretionary. But I'm not seeing that in the results.

We are seeing revenues grow. And so I think that's this really fascinating conversation. As we look, listen, we'll see TJX give us a very good snapshot on people that are specifically looking for value. But then we'll see Birkenstock on the other hand where people are buying perhaps more comfortable spending up. So I think it's much more of a company specific. I think you give a consumer something that they want to spend on and they're willing to spend on it.

Whether that's healthy or not, that's a different conversation.

SEANA SMITH: Simeon, what does the promotional environment look like right now in terms of the channel checks that you've been seeing? And do you expect that trend that we did see play out over the holidays. Is that something that's going to remain intact in 2024?

SIMEON SIEGEL: Yeah. I think that the holiday trend probably will because the holiday trend showed certain companies promoting and certain ones not. And I think that's a really interesting example, like Bath & Body Works is going to report next week. I'm hoping that what they tell us is that they pulled back on promotions because they believe that they can drive a full price sell through.

That's a scented candle, it's not a big ticket item. But it's an item where people feel very passionate about and they're willing to spend. It's clearly a-- well, it's more discretionary than it is staple, though maybe some people would disagree. And so we've definitely been seeing promotions. We've been seeing the companies that need to drive demand. Resort to pulling that price lever.

But we've also been seeing plenty that are not. Talk about prices that are growing. And so I think that's what you want to see. If you're a retailer, if you're an operator, you want to know that the consumer is going to give you credit for items that they believe that you think have value there. And you do not need to drive promotions. But as we saw since 2008, the companies that don't have that, they go immediately to promotions. During the pandemic, we didn't see them, we definitely are seeing them now.