Forget department stores, shoppers are going to Walmart & T.J. Maxx

Retailers Walmart (WMT), Target (TGT), and TJX Companies (TJX) reported earnings this week, indicating consumers' preferences for trade-down purchases in retail chains over department stores. Bernstein Analyst Aneesha Sherman joins Yahoo Finance Live to discuss several of the biggest takeaways from retail earnings as part of the weekly series "Retail Evolution: The New Era."

"Last year, the lower-income consumer was more pressured, but this year we've seen cumulative effects of inflation and high rates impact not just low-income, but middle-income and slightly more premium consumers as well," Sherman explains, detailing how consumers have been forced to adapt their spending habits.

Furthermore, Sherman comments on the state of luxury retail brands as consumers are spending more on going out and experiences, and Tapestry (TPR) is in the process of acquiring Capri Holdings (CPRI) for $8.5 billion

"Short term, it deteriorates the quality of the tapestry because the company they're buying is a slower growth lower margin company," Sherman states, adding: "However, the long-term rationale makes sense, which is basically that they are trying to gain scale in the luxury market to run a direct-to-consumer luxury brand, you need to invest in brand-building and marketing and real estate and flagship stores and events."

Video Transcript

- As part of Yahoo Finance's week long special retail evolution, the new era will be diving into what you should be keeping in mind when making investment decisions. Here to discuss we have Bernstein Senior Analyst Aneesha Sherman. Aneesha, thanks so much for joining us. So when you think about these retailers who have reported-- we have Walmart, The Target, we had TJX, what stands out to you as the trends that we are seeing this time around?

ANEESHA SHERMAN: It is a continuation of the trend that we saw last quarter, which is that, on top of 2022 super strong consumer demand, the consumer this year has been much more cautious, looking for deals, looking to trade down, looking to buy lower priced items within category, and to buy smaller baskets. And we're seeing that trend impact Walmart. Walmart is leaning into it and pricing better.

We're seeing it in TJX, where TJX had average baskets slightly down, average ticket slightly down, but got the comp out of traffic because people are switching out of department stores and shopping at a Marmaxx-- a Marshalls, or TJ Maxx to get better value. So it is definitely the value-seeking behavior that has been consistently the trend across this week's retail results, and I expect that to continue with Ross tonight.

- Yeah, Aneesha, when you take a look at Walmart's numbers here, just foot traffic up 2.8%. They also posted a higher ticket up 3.4% online sales, also on the rise for the quarter. When you talk about this trend, it's a continuation of what we've seen since the start of the year. Is this a trend that you see sticking through the end of the year?

ANEESHA SHERMAN: I think so, yeah. I mean, Last year the lower income consumer was more pressured, but this year we've seen the cumulative effects of inflation and high rates impact not just low income, but middle income and slightly more premium consumers as well. So we're not just seeing it at those low tiers, we're seeing it across the economy, and we're seeing it across segments of retail as well, from discount all the way up to premium and accessible luxury. So I do expect it to continue for a little while longer.

- And so Aneesha, when do you think this pattern breaks out? Because I remember seeing a cycle like this before. The last time around where I saw this trade down when you were thinking of even the higher income shopper going to-- switching and converting to TJ Maxx, The Marmaxx brands, was the Great Recession. I don't know if you're old enough to have been around then covering it. (LAUGHING) But want to ask is, do we see any kind of trend shifting away from that before the year is out, especially when you consider this back half of the year? It's such a crucial time for retailers.

ANEESHA SHERMAN: Yeah. So the dynamics during the GFC were that, it was the big trade down event that actually really helped TJX and Ross. 2009 was one of the best years for TJX and Ross because we saw a huge amount of trade down. The big difference is, that was a sharp shock. Huge amount of consumers lost their jobs. They had to immediately shift their spending habits, and we had some really negative comps across retail.

This time around it's been more slow. Unemployment still remains really low. People still have jobs. But it's inflation that's creeping up. And so the trade down has been more gradual. We've seen it happen over-- this is a third quarter now where we've seen traffic at these discount retailers up and traffic at the mainstream retailers down. And so that share shift is happening more slowly. It's not ripping off a Band-Aid. It's going to be a slow burn for the next couple of quarters.

- So Aneesha, let's talk about the other end of the spectrum when we take a look at the luxury consumer. Tapestry was out with its results. Disappointing year. US demand clearly waning a bit, at least when you take a look at these numbers. Before we talk about their acquisition last week, what can you-- is this a start of a trend just in terms of weakness that we're seeing in luxury here in the US? And is that maybe indicative of what we could see overseas?

ANEESHA SHERMAN: Yeah. These companies, these accessible luxury companies, as well as high luxury companies had a phenomenal year last year. They had limited supply. The consumer was out and about for the first time post COVID, and was eager to buy accessories, and ready-to-wear, and shoes for going back to weddings, and going on trips, and going back to work, and so on. So we had this huge wave of pent-up demand.

And Tapestry's North America number was 26% growth last year, and this year it's about flat. So part of it is just lapping a very strong year. But beyond that, it's also indicative of this broader trend that we've been talking about. The consumer is getting more value-seeking, not interested in buying as many discretionary items, and is looking to do some trade down. So we've seen some of this flagging consumer demand across the luxury sector as well as further down the premium as well as mainstream retail.

- Aneesha, I got to ask you, what do you make of that deal of Tapestry and Capri, especially when you think about that point about the direction that you've seen some of Tapestry brands go. I've seen more coach bags than I could remember in-- I never used to see them in TJ Maxx. I've seen a bunch of them now. And when you think about them purchasing-- I mean, we've seen cause in decline. Does this even make sense from your point of view?

ANEESHA SHERMAN: Short-term, it deteriorates the quality of the Tapestry portfolio because the company they're buying is a slower growth, lower margin company. They're levering up to do it so it deteriorates their balance sheet. They're pausing their buybacks so it takes a few off their earnings growth for the next couple of years. So on all metrics, it's a lower quality company now and is valued it should be valued at a lower multiple.

However, long-term rationale makes sense, which is basically that, they are trying to gain scale in the luxury market. To run a direct to consumer luxury brand, you need a lot of scale. You need to invest in brand building, and marketing, and real estate, and flagship stores, and events, and you can do that much better when you have better firepower in terms of higher cash flows, higher marketing budget, and that's a lot easier to do when you are a $12 to $15 billion brand than when you're a 6 to $7 billion brand. So that is the long term rationale, which I think makes sense. But short-term, it does deteriorate the quality of the company.

- Aneesha, do you see Tapestry after acquiring Capri-- is it going to be a real competitor to some of the larger players, the leaders in this space when you take a look at LVMH and also Kering? I don't think we're going to see it replace LVMH or Kering any time soon. However, I think it will start to access the lower end of that demand. So accessible luxury band within a Kering, or within some of these other high luxury brands, is what they're looking for.

They're not looking to be the next Chanel. I don't think that's feasible. I think they're looking to take a step up. And in order to do that, they need to attract a different consumer, a higher end consumer, and they need this kind of marketing brand building ability to do that, and they need the scale for that to work. So it does make sense. I don't think it's going to end up being a high luxury brand any time soon, but I think it's going to take a step up from where it is now.

- Well, we're certainly seeing them build the scale. We'll see if they build up the luxury cachet that they're trying to go for. Aneesha Sherman, thank you so much.