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What to expect from retail earnings this week

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Joe Feldman, Telsey Advisory Group Senior Managing Director, joined Yahoo Finance Live to discuss what he expects from retail earnings this week.

Video Transcript

- And I wanted to jump right into Walmart. We know it's a powerhouse. But some of us may not be aware about what they're doing-- as you pointed out in the note-- with advertising, merchant services, health services, and digital payments. We just had, you know, the credit card. It seemed very, you know, 20th century to me that Walgreens is doing a credit card. Tell us about Walmart.

JOE FELDMAN: Yeah. So Walmart is doing the same things Amazon is trying to do, effectively. They're almost mirror images of one another. And Walmart has tremendous amount of data, tremendous customer traffic flow into their stores. Well, they're starting to look to ways to monetize some of that.

Advertising is one way. They can help consumer product companies figure out better ways to market their products in the store to the customer, online as well. They have a marketplace very similar to Amazon's marketplace that they have. A lot of money that Amazon makes and a lot of their sales are really because of the third party market vendors that they have. And so, again, that's something that Walmart's doing.

So Walmart has become very savvy, a very tech forward company, and they're really innovative, I think, in the way that they're thinking about their business in trying to create a whole ecosystem in much the way that Amazon has tried to do for their consumer.

- This is Emily. I'm wondering with Home Depot, of course the other major retailer reporting results tomorrow morning, what are your expectations there, especially as it relates to overall trends, the guidance that they may actually give, given a bit of a slowdown that we've seen in the housing market as we pace through 2021?

JOE FELDMAN: Yeah. So Home Depot, and Lowe's for that matter-- it's kind of interesting. I think the second quarter's going to be fine. I think, we saw very good trends for home improvement through the second quarter.

That being said, there was a deceleration, and each month was a little bit slower than the prior month. And I think that that is where we could see in the second half, as things play out, people have done a lot of spending on home improvement supplies. And I think that that could become more of an issue as you go forward. Plus supply chain constraints are likely to continue to have an impact here on the gross margin.

So while the quarter should be fine, they should put up good numbers, I hope I'm wrong. I hope that home improvement spending is going to hold up better than I'm thinking right now. But the second half we could see a continued slowing of that trend.

- I want to point out, too, that when we look on Wednesday at Lowe's, you've kept the price target the same. But for Target you've raised the price target from $265 a share to $305 a share. So let's look at Target. What are they doing right, in your opinion, and will they confirm it on Wednesday?

JOE FELDMAN: So Target has done a lot right this year and the past couple of years, really. I mean, I think that they've really reinvented themselves by overhauling their whole merchandising strategy. They've really focused on better quality products, differentiated product. It's mostly private branded product at this point, aside from grocery where there's a lot of consumables and basic items from the CPG companies.

But on the apparel and the home side they've done a very good job. That's drawn traffic. It's drawn customers in, especially as the economy has been reopening. Now I know Delta variant is having an impact there. But through this reopening we've seen people gravitate towards more apparel, still spending on home furnishings. Target's exactly in that wheelhouse.

And now with back to school coming, I think both Target and Walmart are poised to do very, very well in that period, especially with the child tax credit that comes once a month now to families. And schools are starting, like it or not. And I think that there is going to continue to be some spending there.

- You mentioned the Delta variant. And how are you thinking about that potential risk to the US consumer? Because we did get that University of Michigan surveys of consumers, and that headline index down to a 10-year low just last week. And I'm wondering, where do you think consumer spending might go from here if there are those concerns?

JOE FELDMAN: Yeah. We are concerned that we might see a bit of a repeat with the slowdown because of the Delta variant now and how it's going to impact people going to stores, going to restaurants.

The good news is the consumer has money. Their balance sheet is much better than it was pre-COVID in many ways. More affluent people for sure are doing a lot better. But even those at the lower end of the income spectrum, they've been getting a lot of government support. And so I think that, while you could potentially see a bit of a slowdown in traffic to stores and to restaurants, spending on goods is still going to remain elevated.

We're still hopeful that it's going to be a pretty solid back to school and holiday season overall. I think holiday still should be good. People want to feel good. This COVID has really been weighing on us for so long that I think that people want to spend, and are going to continue to do so.

- I think the estimates are that back to school is going to be about $38 billion. I want to ask you a generic question about retail in general and brick and mortar retail, based on my bad observations. I was inside the Macy's here in New York City just yesterday. We need new sheets. And it was packed-- a lot of people.

Is the death of brick and mortar retail overstated? Because prior to the pandemic, what we would hear people say is, it's over, real estate-a-fied. But we've seen that real estate number contract. So are we now at a point of balance?

JOE FELDMAN: We're in much better position than we used to be. I think that higher quality real estate is definitely getting people to go to the stores. We think physical is here to stay. It's not going away. And if you think about, for so many of the old line retailers, like a Macy's, so much of their business now, even though it's done online, it's actually picked up at the store, or it's fulfilled by the store.

Target is like the poster child for that. They do a great job with fulfilling from the store. Like 95% of all their sales touch a store in some way. So we very much believe in physical retail. I think it's a healthier industry than it was a few years ago. There's still some dead physical space out there that needs to get cleaned up and go away. But for the most part, we are on a better path than we had been pre-COVID.

- How are you thinking about some of the labor shortages we've been hearing in the service sector, as well as for a lot of these retailers? Do you think we'll have passed that peak mismatch in supply and demand on the labor front in the second quarter?

JOE FELDMAN: I hope so, but I'm concerned. I mean, when we speak to the retailers and the suppliers, restaurant companies, they're having a really difficult time finding labor and retaining labor. And then I've heard some people the past few days have been telling me that even if you find people for the job, getting them to show up has been part of a problem.

So there is that concern right now as to what's happening from a labor perspective. Every retailer we speak to, every manufacturer we speak to is telling us that there is wage pressure. And labor pressure is here-- I think it's going to be here for many years to stay. We're going to just see this ongoing pressure each year where it's just a part of doing business you're going to have to deal with as a retailer.

But it is definitely impacting the margins right now. And it has been difficult to provide proper service. In fact, just a personal anecdote. I was at a restaurant the other day and I had to wait 15 minutes to get a table, even though there were like 60% of the tables available in the restaurant, just simply because they didn't have enough servers to provide the service for me to sit down.