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Retail stocks rise while forecasting for a more cautious consumer this holiday season

Yahoo Finance Live takes a look towards several of the retail sector leaders and how they are positioning their brands ahead of the holiday shopping season.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: Retail earnings this week giving us an inside look at the consumer. And the big takeaway so far is that shoppers are adjusting their spending habits. Today's standout is Macy's. Its third quarter was solid, sending shares up the most since May.

Among the drivers here, a big beat on earnings and better-than-expected guidance. CEO Jeff Gennette saying in a statement, quote, "We know the consumer is under increasing pressure and has a choice on where to spend." Macy's high-end stores Bluemercury and Bloomingdale's outperforming, proving that the luxury consumer remains strong.

But that certainly is not the case for middle- and lower-income consumers. Also out today, Kohl's. The department store's third-quarter earnings beat. But it pulled its fourth-quarter outlook amid some of these macroeconomic challenges. CFO Jill Timm saying on the earnings call that the retailer, quote, "saw our middle-income customers continue to purchase fewer items per chip-- per trip and trade down."

That's similar to what we heard from Walmart earlier this week. CFO John Rainey saying that consumers are more cautious in trading down to cheaper items. A warning spending could slow this quarter, Rainey telling analysts, quote, "Despite a good start to Q4, our guidance assumes that the consumer could slow spending, given persistent inflationary pressures in food and consumables."

And that holds true for Target as well. CEO Brian Cornell saying, quote, "Consumers are showing increasing signs of stress and pulling back from discretionary purchases." Obviously a huge hit here to Target in its most recent quarter, bringing up some concerns about what the holiday quarter is going to look like.

And, Rachelle, we've talked about higher rates, inflation being a massive headwind here for consumers. Up until now, the consumer has been willing to stomach those higher prices. But as we continue to hear from some of these larger retailers, it seems like that narrative is starting to change.

RACHELLE AKUFFO: It is. And we're really seeing a bigger focus on what they're spending the money on. They used to, you know, use a bit of that discretionary income. But now we're seeing that they're spending on the essentials.

We saw from Walmart it was the groceries that were helping their earnings, as a lot of people were looking for, you know, cheaper alternatives for food, looking for value in the sort of economy. Interesting, though, still seeing a lot of resilience for the luxury shopper. They clearly seem to be better insulated.

As we were just talking about with the housing guest, that market, that demographic seems to be fine. But for people who are in the middle or lower income, they're having to make some difficult choices. And we're seeing that reflected in some of these retailers, Seana.

SEANA SMITH: Yeah, certainly. And that is why Walmart has outperformed because some consumers are trading down, more people reallocating how they're spending, spending instead on groceries instead of some of those discretionary items. So we're starting to see this divergence between performance when it comes to Walmart and Target, two companies that you think would be OK in this type of environment. But Walmart clearly the out-performer up until this point.

When it comes to Macy's, the jump today, 13%, was a little bit of a surprise to me, just given the slowdown that we could potentially see in this current quarter and looking out into 2023. But management there at least turning the ship a bit. At least that looks like how Wall Street is interpreting these latest results. We'll see, though, how some of these larger retailers that we haven't yet heard from that we'll get results from in the coming days in coming weeks, how they're faring up until this point.