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Kanye West’s Gap partnership ‘never got to level of hype it was expected to’: Analyst

Barclays Consumer Discretionary Analyst Adrienne Yih joins Yahoo Finance Live to discuss rapper Kanye West's decision to terminate his partnership with Gap, overall August retail sales, and retail trends to watch amid inflation.

Video Transcript

RACHELLE AKUFFO: Retail sales coming in stronger than expected in August. As you can see on the screen there, rising 0.3% versus expectations of -0.1%. We're here to discuss this and other trends we're seeing in the sector is Adrienne Yih, Barclays Consumer Discretionary Analyst. Good to have you on, Adrienne. So I want to first get your reaction to this retail data?

ADRIENNE YIH: It's not really that surprising. I would say, sort of when you're in this kind of 0.3% range, there's an error factor that's in there. So it's effectively flattish on a sequential basis. If you look at the retail trade number year-on-year, we actually prefer to look at year-on-year growth, because it kind of bakes in AUR or the price increases.

And then we always take a look at that sales growth, that dollar growth relative to what we're expecting in inflation. So on a year-on-year retail trade, was only-- it was up about 8.9%. And if you look at the drivers behind that, it's gasoline, it's building products, it's grocery, to the detriment of clothing and department stores, which are at the lower end of that kind of year-on-year growth.

DAVE BRIGGS: Speaking of clothing, Kanye West terminates his deal with the Gap, citing substantial noncompliance. Can Kanye West go it as a solo artist in the retail industry and what's the impact on the Gap's bottom line?

ADRIENNE YIH: The Gap, you know, entered into this agreement with him a couple of years ago, and it was a long time in coming to actually deliver the initial product. He is clearly a phenomenon from a PR standpoint, from a media standpoint, from an attention getting standpoint. And he certainly brought in a different consumer, than kind of Gap core, which I think we talked about, David.

This is sort of more in the mid 30 to 40-year-old range. And what they really need to do is sort of really ingratiate themselves with Gen Z and millennials, and I think that was really doing well for them. From a financial perspective, I'm not really sure that Gap had actually gotten into the profitability generating piece of it. There was a lot of investment in R&D and design, and quite frankly, there wasn't a ton of volume sales that were yet driven from this partnership.

SEANA SMITH: So Adrienne, do you think there was too much excitement then over this partnership and what that would actually mean for Gap?

ADRIENNE YIH: You know, the day that it was announced, the Gap stock actually went up sort of a double digit number, if I recall correctly. It had a very, very positive reaction. Back when that was announced, there were many other things that were announced simultaneously. Gap Home, the collaboration with Walmart.

And so there were a number of things that Gap had sort of in the hopper, that were things to come, that were all going to be drivers of kind of reinventing the business. So I would say that the expectations for the Gap and what the potentiality of that partnership bringing in future sales, I would say that probably never got to the level of hype that it was expected to.

RACHELLE AKUFFO: And I want to talk about your everyday consumer who is perhaps not buying their Yeezys, but as you look at what consumers are spending their money on, which companies do you think are best positioned to really take advantage of this shift that we're in right now?

ADRIENNE YIH: Yeah, so one of the categories, and I'll answer. One of the categories that was actually down year on year and down sequentially was home furnishing. But something to be noted, not many categories were down. One was electronics and the second, just by a hair, a percent or so, was home furnishings.

Most others were up in terms of sales. We don't think there was margin there, but the one area that's really doing well is beauty. So we have this furry is called mask on, makeup on. And so at the beginning of the year, you had all these masks come off, all these women, and there was a return to travel, to work, to occasion.

And what we called the wearing occasions for makeup, went up. And Ulta is a huge beneficiary of that. They just gave sort of back test, very, very conservative guidance sort of mid-single digit comps. We think they're running easily low double digit quarter to date. And so Ulta is really one of those that we think is one of the 20% of the cohort in a demandatory environment that can really power through and the secular trends are very much with them.

DAVE BRIGGS: In the inventory discussion, and really the problem started with Target. Are you seeing indications that the inventory backlog is starting to clear? Or is it still a long road ahead for retailers?

ADRIENNE YIH: So we do a lot of work on inventory. And we do this one metric called-- we call it the inventory management spreads. It's sales dollar growth minus inventory dollar growth. What we found at the end of the second quarter is that on average US specialty frontline retail inventory is growing 34% faster than sales was growing.

Now compare that to the prior quarter, it was growing 22% faster than sales was growing. Part of the issue is you've got double digit inflation in that inventory number and you also have early receipts. At the end of July, they were bringing in holiday. And so you have about four to six weeks of early receipts for holiday that are bulking up that number, making it artificially look high.

So we actually think that this is the bottom, the worst of that inventory. And you're going to see these retailers having cut receipts in the future third quarter and fourth quarter. And then they're promoting. So if you sell something 50 or 60 off, at some point it's going to start moving.

And so at the end of the third quarter, watch that number because we think that from this point on, you're going to get an inventory purging as we exit 3Q and certainly as we exit the fourth quarter. That does not mean it's time to buy these stocks on hold. That means that we're kind of climbing out of this kind of deep valley, but there's a lot of work to get through. And there's probably one more pretty solid margin hit to this year's numbers in the fourth quarter.

SEANA SMITH: Adrienne, what do you expect to consumer spending to look like in the holiday quarter?

ADRIENNE YIH: We're looking for, if you kind of-- we look at sort of year-on-year sales growth, and about half of the companies that we cover actually are now posting negative sales growth. We expect that proportion of our coverage universe to be about 75%. The majority of them are likely to post negative sales, negative comp growth in the fourth quarter.

Notwithstanding the fact that they're going to be spending through a lot of volume, just at very low prices because they're promoting so much. So we would argue that sales growth is going to be pretty anemic. Certainly in apparel it's going to be definitely the lower end of that. And the one caveat that we would make for 2023 is, as go frontline, they buy about six months in advance from their wholesale partners.

So just be careful about the wholesale vendors who sell into them. Their demand shock is about six months delayed. And we worry that really in the first half of '23, you're going to see the wholesalers start to have evidence of the demand destruction that we're seeing now at frontline retail.

DAVE BRIGGS: All right, well, interesting road ahead. The retail story from Barclays, Adrienne Yih, appreciate you being here. Thanks.