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Some retailers had 'artificial bursts' due to pandemic: Analyst

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Target posted second quarter earnings that blew past expectations. Forrester Research Retail Analyst Sucharita Kodali joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: Let's turn our attention to shares of Target, sliding in the session. It is down about 1 and 1/2% right now, despite the company raising its forecast for the year on the back of a strong start to the back-to-school shopping season. The company saw its sales rise in nearly every merchandise category in the most recent quarter, earning $3.64 a share on revenue of $25 billion.

For much more on the retail roundup here, let's bring in Sucharita Kodali. She's Forrester Research retail analyst. And, Sucharita, we should mention, in addition to those strong numbers in the quarter, we saw Target announce a $15 billion stock buyback. So why are we seeing this stock down so much today?

SUCHARITA KODALI: I think that it's probably some investors just taking some of the gains. The company has been up tremendously over the last year. It had a great pandemic, and-- and I think that it's too early to tell if this is going to have a major impact. I mean, the company is just doing-- doing very, very well. Any downturn is just, I think, people cashing out.

BRIAN CHEUNG: Hey, Sucharita, it's Brian Cheung here. Now broadly speaking on the retail sales front, we did see that Commerce Department data showing that, in July, retail sales did fall. Obviously, that would not have been reflected in the quarter that is being reported now. So when you do look forward to the next quarter for some of these big retailers, do you expect to also see a drop there? Is it kind of also lining up with whatever guidance these companies have provided in their earnings calls?

SUCHARITA KODALI: Well, this coming quarter-- the next quarter is going to comp against the depths of the pandemic. The past quarter, you have to remember, was comping against March, which was the beginning. But there were still a few strong weeks in-- in the month of March, so it's a little bit of foreshadowing of what's to come. But this next quarter for pretty much every retailer, except perhaps grocery, should experience enormous comps, where we're talking about essentially a recovery. And the number to look at really isn't even-- I don't think the comparable of 2021 over 2020, but to see how their 2021 numbers are shaping versus 2019 because I think that's where there's a better portrait of, is there-- is there really demand for whatever that sector it is that we-- that we're looking at.

AKIKO FUJITA: How are you differentiating between some of these retail names? If you look at the quarterly performance at least, it does seem like the big box names still are seeing significant strength, not just online, but also in their return with customers going back to the brick and mortar stores. And then you've got a name like Home Depot that came out yesterday, sort of pointing to the fact that-- that the home improvement-- the DIY projects may not be keeping up, especially as more and more people get vaccinated and look to other activities.

SUCHARITA KODALI: Right. And where-- where you saw some of-- and I think that some of that could have been reflected in companies like even Peloton and others, there were certain companies that did disproportionately well through the pandemic because there was a shift in spending away from wherever consumers may have been spending before. It could have been travel. It could have been-- it could have been in automotive.

And, you know, we were seeing the shift to sheltering. Kind of things like-- like at-home fitness equipment did particularly well. Those categories had those artificial bursts. So in 2021, as companies are norm-- as the consumer is normalizing their behavior, you can't expect those same growth numbers.

And those are the handful of numbers that you will probably see a little bit of a softening. How Home Depot does, typically Lowe's does. You'll see companies likely like Wayfair that may also experience a little bit more softness versus the burst that they saw during the pandemic. But, that said, on the other hand, it's these sectors like apparel and the restaurant sector that should do extraordinarily well because they had such a depression that was artificial in 2020, that you start to see more of that normalization that takes them back to their 2019 spend levels.

BRIAN CHEUNG: And, Sucharita, I guess you kind of get at that point already that it's going to be different across category. But are there certain types of-- I mean, you pointed out that the next quarters could certainly see some base effects from being compared against the depths of the pandemic last year. But are there other types of categories that you're specifically watching that could get either a seasonal or a structural bump from the reopening?

I mean, you take a look at some of the clothing brands that have done pretty well. It was interesting to see that, even within the retail sales report, specifically women's clothing has been getting quite a bit of a bump. We've seen prices even notch up on some of those types of goods. Other types of categories that you're specifically highlighting, heading into the next quarters?

SUCHARITA KODALI: So the categories that I think are important to look at are where we've seen some of the biggest areas of-- of just shift in change, certainly the restaurant sector, which seems to be recovering. We will see if-- so long as other variants we're hearing about-- things like the Gamma variant-- hopefully we're not going to see other issues that would potentially cause people to go back home and kind of not continue their spend levels. The durable goods, so automotive is also a category to look at. Some of that is due to pandemic recovery, but also you have supply chain issues.

We are seeing that the supply chain issues should normalize by the end of the year. So some of those bursts that we saw through 2020 will likely-- will likely flat-- likely flatten, and it will be easier to be able to buy things like-- like a new car by the end of the year. So I anticipate those are some categories to keep an eye on.

In-- in conjunction with the automotive space, we look at gasoline. That's been all over the place. Seemingly it's on a path to-- gas stations at least-- on a path to recovery. But we'll see how that continues through 2021. Even outside of retail, I look at sectors like health care and travel as well because those are consumer spend sectors, and they're a significant part of the economic recovery is going to have to take those into consideration as well.

BRIAN CHEUNG: A sobering reminder that the Delta variant certainly won't be the last Greek letter that we'll be hearing about, but Sucharita Kodali, Forrester research retail analyst, thanks for stopping by.