Consumers are spending while making sure retailers are 'catering to them': Analyst

ProShares Global Investment Strategist Simeon Hyman and H Squared Research Chief Research Officer Hitha Herzog discuss retail earnings from Walmart, Target, and others, and what it means for the state of U.S. consumers.

Video transcript

BRAD SMITH: There was a mixed picture for retail this earnings season as Walmart saw a strong growth in its grocery category as consumers get more cautious about spending, and ecommerce sales that jumped 26%, where Target saw online sales lag, with the digital comparable sales falling for the second straight quarter. So what does this tell us about the state of the US consumer?

Joining us now, we've got Simeon Hyman, who is the ProShares Global Investment Strategist, and Hitha Herzog, who is the H Squared Research Chief Research Officer. Great to have you both here with us on this Friday morning to round out what has been off into the race as part of the retail sector earnings season here. If we are to kind of summarize this in one word, Simeon, what would you annex to the retail earnings that came through this season?

SIMEON HYMAN: It's not omnichannel yet. I was just looking this morning at-- we at ProShares, we have an online retail index and a separate brick-and-mortar index. So we split them.

And if you look at earnings season, so far, you've got about half the retailers in so far. The online index has grown, earning 76% year over year, the brick-and-mortar index, -1%. So we're not quite to the point where half of the Walmart square footage is last-mile fulfillment with drones flying out of it.

JULIE HYMAN: Yeah, I mean, Target even had a drop in its online sales, which is also pretty interesting here. Hitha, what do you make of it, right? It has been really interesting to hear the likes of Targets and Walmart for them. And that still point to people not buying electronics, not really buying apparel. It seems like things are really split right now.

HITHA HERZOG: That makes complete sense, though. If you walk into a store, the last thing you're pretty-- you're probably going to do if you're watching budget is make a big ticket purchase. You're going to focus on the essentials, the groceries. If you have to remodel, like, your home, or you want something new, you're going to buy something small.

So people are really paring back and what they want to purchase and how they're spending that money. And also, I tell people how there is a real bifurcation on how people spent before the pandemic and then after. There was a lot more store traffic in the stores. And then the consumer just got used to spending time on their sofas, spending their money while shopping on their phone, they're scrolling. I always say that if my phone is across the room, that purchase is not going to get made. If I have to walk across the room, get the phone and go ahead and make that purchase, it's not going to happen.

JULIE HYMAN: You know, I'm curious in the retailers that you're talking to, kind of what the sentiment is like. Walmart seemed to be in a better position. But even Target, in doing badly, is still sort of measured in its commentary. Is there fear out there among retailers? Like, how are they feeling?

HITHA HERZOG: I think for-- well, the big box stores, what we're talking about now, I think right now we're seeing them feel a little bit more confident going into the next quarters. And definitely, in the next year, you saw Walmart raise their guidance, the same thing with Target.

They are-- those retailers are realizing that because their concentration is so much on grocery and those essential items, and they're really just doubling down on that-- I talked to one of the chief merchandising officers, well, actually I did-- I did a talk at "Shoptalk" with one of the team members of Walmart Merchandising. And she was saying how Walmart really narrows down on the merchandising per local stores.

So when you have that localization of merchandise, you tend to get a lot more traffic in the stores and people buying that more.

BRAD SMITH: And so just to-- just to follow on that really quickly, and we'd love to get both of your responses on this, Hitha, first to you, does anything about the consumer right now signal what we've been hearing from other CEOs this earnings season in a Q3, 2023 recession?

HITHA HERZOG: So what we are seeing with the consumer right now is that they are-- they want to go out and shop. But what they are doing is making sure that the retailer is catering to them.

So I was looking at the Unified Benchmark by Manhattan Associates. They were saying that the retailers that really focus in on things like fulfillment and making sure that the consumer is basically have this-- has this return policy on lockdown, they can sit there and return things very quickly and have that logistical side, basically, running like the turnkey, that is the retailers that are going to fare well.

The consumer, like I said, is really getting very specific about where they want to shop. They want that holistic approach to shopping if they're going to spend their money. And so while I don't think the consumer is going to be spending, you know, like they did pre-pandemic, I think they are going to be very, very careful about that.

They're still feeling scared. There's still headwinds like inflation coming out, even though we're seeing inflation decrease a little bit. They're still-- they're still nervous.

BRAD SMITH: Yeah, I was one of those consumers, of course, who has taken things home to check them out in my own mirror just to see how they look and then and then, probably, return a few of those things. But the same question to you, Simeon.

SIMEON HYMAN: Yeah, I think the mixed results we're seeing from the retailers and consumer, sort of tepid behavior, is consistent with what we're seeing across the economy. That's pointing to-- the debate between a soft landing and stagflation light, I think it's almost a distinction without a meaningful difference.

You know, we only had 1% GDP growth in Q1. Suppose that goes to -0.5 or even minus one. Is that really a big difference? And if inflation comes in at 2.75, and we don't declare victory, or it comes all the way down to 2%, I think we're in that realm of somewhere between a soft landing and a very mild recession. And I think the consumer is behaving just like that.

JULIE HYMAN: What's also interesting to me is, as we look-- you know, there's the big macro picture and what this means to the economy. There's what it means for if I'm an investor, which retail stocks I might want to look at right now.

I think the point you're making is really interesting because we've been talking about consumer discretion, consumer being choosy about what they're buying. I think your point is not only that they're being choosy about where they're buying it because the stakes are so high right now for these retailers to execute pretty much perfectly. I mean, we see Bed Bath & Beyond, obviously, was not executing perfectly and paid the price.

HITHA HERZOG: Right.

JULIE HYMAN: So looking, from what we've heard from this thus far, looking ahead to specialty retailers reporting like The Gap or Macy's on the department store side, how do you think that's going to play out?

HITHA HERZOG: Well, it's interesting because, in that unified benchmark, it was saying that department stores-- you know, we've had this sort of conversation around department stores, anchor stores are starting to close down in malls. But the likes of Macy's have really looked at their metrics and saw what their consumer was doing, what their customer was doing, how they were trying to shop, and what they wanted.

Do I think the flagship Macy's really needs some help still? Yes. Do they have it perfect? No.

But what they are really trying to do is marry that omnichannel, which-- I don't love that word. I'm sorry.

I think that we need a new word for it. That's been around for almost 12 years now. But they want another-- it's another-- they want a fulfilled experience.

And I know I keep talking about this returns aspect, but when you have the consumer buying things online, trying them on, and sending them back, that is how the consumer shops. I was thinking about the statistic that I read the other day, that a fourth, excuse me, a third of Americans under the age of 10 don't know what it's like to go into a store and shop. And that makes complete sense.

Julie knows I have twin four and a half-year-olds. They don't know what that whole surprise and delight is like going into a store. Their surprise and delight comes from when the Amazon packages come to our home. So when retailers start understanding that is the new consumer coming in, and they're starting to switch their buy, to switch their merchandising to understand that surprise and delight comes in a box, that's when we're really going to start seeing traction, especially into the future.

JULIE HYMAN: That is a really good point as I think about it. Like, I remember many hours spent being dragged around with my parents at the mall.

HITHA HERZOG: Right.

JULIE HYMAN: Now, you don't need to do that because you just go online and buy. But the surprise and delight, I guess, is mitigated when you try it on in the mirror, or it doesn't fit, or whatever it is. And then you've got to send it back.

HITHA HERZOG: Exactly. That's kind of a bummer.

JULIE HYMAN: That's so interesting, though. These kids who are going to be digitally native in terms of shopping.

HITHA HERZOG: Yeah, if you think about it, my daughters have been into a mall once. I grew up in a mall. This is why I do what I do because I love the mall. But my daughters don't know what that experience is like, or they don't have that fulfillment from it.

JULIE HYMAN: Really interesting. Hitha, great to see you. Thanks for coming in.

HITHA HERZOG: [INAUDIBLE].

JULIE HYMAN: Hitha, an old friend of mine. H Squared Research Chief Research Officer.