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Retail analyst: Consumers trading down 'could be more prevalent' in 2022

Goldman Sachs Managing Director and Retail Analyst Kate McShane joins Yahoo Finance Live's Brian Sozzi at the 2022 Goldman Sachs Annual Retail Conference to discuss the state of the retail industry and price targets for stores like Bed Bath & Beyond.

Video Transcript

SEANA SMITH: Goldman Sachs wrapping up its annual Global Retail Conference. Let's head back to Brian Sozzi, who is still at the conference. He's joined now by Kate McShane, Goldman Sachs managing director and retail analyst. Sozz.

BRIAN SOZZI: Hey, Seana. There ain't no quit here. We're going to keep going. Kate, good to see you. It has been a busy day for you here at the conference. Is there anything that has surprised you?

KATE MCSHANE: I think the tone of the conference has been pretty positive. I mean, the big question coming into today is just how is the consumer. People care week to week. I mean, we heard from a lot of these companies a couple of weeks ago when they reported Q2 results. And I think everyone was a little surprised about the uptick we saw and heard about around August, around back to school. New Halloween items coming to the store has had a good response. And so all of that has been discussed today.

SEANA SMITH: Kate, how confident are you, though, that the consumer is going to remain strong, right? Because inflation is at least trending in the right direction, but consumers have been willing, at least, in the past, over the last couple of months, pay up for some of those goods. Do you think that there's enough in order to believe that that trend is certainly going to stay intact heading into the holidays?

KATE MCSHANE: It's a great question. And I think we have yet to really figure out what's going to happen. What we do know is that we have started to see more evidence of tradedown. We've been seeing tradedown in grocery for some time now. But in the past couple of months, as evidenced by what some of our companies said during the second quarter, they started to see more evidence of higher income consumers trading down to more value items. So I think that is a testament to the fact that the consumer is feeling a little bit more challenged by inflation.

So as we go into holiday, I think our thought is, is that that tradedown could be more prevalent than it's been in the past year. And then as we look into 2023, we'll see what happens. It really does depend on what happens with the economy. We do, do a discretionary cash flow model here at Goldman that indicates that we continue to see pressure on that lowest end consumer, going into the back half of the year.

BRIAN SOZZI: Kate, one reason, among many, we love your work here at Yahoo Finance, you actually-- you make calls on these stocks. You're not just slapping neutral ratings on and then just sending out these reports. Let's focus in on some of your calls. Your sell rating on Best Buy into the holiday shopping season, take us through that call. And what does that stock-- what do you need to see to get more optimistic on a stock like that?

KATE MCSHANE: Sure. So we've had this sell on Best Buy for a little while. Part of it had to do with the fact that Best Buy saw very strong demand during the pandemic, based on the fact that everyone was working from home and schooling from home and needed the technology to support that. And so we felt that as we lapped stimulus and we lapped some of that demand, that the top line would be a little bit less robust.

What we didn't know was that the macro environment might get a little bit more challenging. So I think that's what has been pressuring the top line for Best Buy, in addition to some of those other items I mentioned. But in addition to that, we've been a little bit more worried about margins as well for Best Buy. Most retailers you talk to are expecting a more promotional environment. We saw what happened with Walmart and Target in this past quarter. Inventories are building.

And so that is going to be an area that puts more pressure on margin for Best Buy, along with the fact, too, that they have a new initiative with their Total Tech subscription program that's a little bit more costly to implement that they're not quite leveraging. So the fact that there's pressure both on the top line and the margin keeps us at a sell.

BRIAN SOZZI: And Kate, you also cover a sell rating on what has turned out to be a volatile name in Bed, Bath & Beyond. $2 price target. Is this company likely to survive? Where do you see-- what are the next couple of steps here? It's been a very challenging two weeks for them.

KATE MCSHANE: Yes, it has been a challenging couple of weeks. When we listened to their call on Wednesday, there certainly is a plan to try and survive. And I think part of what they indicated was maybe they went a little too far with private label. We have seen that from other retailers before where private label is a delicate dance. A lot of times, people come into the stores for national brands. The private label is there as an opening price point. It's a value option. But it's not necessarily what drives traffic. So I think Bed, Bath & Beyond focusing on national brands or bringing more national brands into the store or back to the store to the extent that they can is a step in the right direction.

BRIAN SOZZI: We've watched a lot of retail chains not-- just disappear-- Sears, Circuit City. We've seen a lot of these stories. Is Bed, Bath-- do they exhibit those type of concerns, vendors pulling back, cash flow concerns? What do they need to do?

KATE MCSHANE: Yeah, I mean, they need to get the customer back into the store. And so I think that's why the national brand focus is so important for them. There are certain tenets of retail that we think work really well right now. And that is if you have a reason to go to the store and you get that traffic, or you're OK just with digital-- so if we use Target as an example.

We think Target kind of checks the box in terms of what you want out of retail today. You have the convenience of if you have to pick something up, you can go to Target. You can do the one-stop shop. Not every retailer has those tenets. So, again, I think Bed, Bath & Beyond is working on trying to at least check a couple of boxes to try and return that customer back to the store.

BRIAN SOZZI: All right, we'll let you get back to that conference. Kate McShane, retail analyst, love your work. Big fan here at Yahoo Finance. We'll talk to you soon.

KATE MCSHANE: Thanks for having me.