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Inflation, sustainability top of mind for consumers, analyst says

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Stifel Sports and Lifestyle Brands Analyst Jim Duffy sits down with Yahoo Finance to talk about how invested American consumers are in sustainable brands, changes to spending behavior amid inflation, and retailer inventories.

Video transcript

DAVE BRIGGS: Bombas, Patagonia, North Face just a few of the consumer brands at the leading edge of sustainability efforts. But do we even care when making purchases in the face of record breaking inflation? Jim Duffy is the Stifel sports and lifestyle brands analyst. He's here to discuss a surprising new study. Jim, it's good to see you. I'm obviously a bit skeptical that consumers of any age are considering sustainability, given the economy, given inflation. What did you find?

JIM DUFFY: Well, let me share some data with you, and hopefully I can convince you otherwise. So, today, we published our Stifel Sustainable Lifestyle Brands Consumer Research Effort. This is a survey of 11,500 consumers across six different countries. We focus on consumer perceptions of sustainability. Indeed, consumers do care. 81% of consumers in the US tell us that brand sustainability practices matter to them. 36% say it's very important to them.

And what's interesting, looking at the data, is who these consumers are. As measured through consumers who are willing to pay more for sustainability, the consumers are generally younger, Gen Z and millennial consumers in particular. They're higher income, better educated, and live in urban areas. And so, in other words, they tend to be high value consumers for these brands.

As you mentioned, however, this is the second annual survey, and we did see some interesting year to year changes in the data. We asked consumers to rank their priorities when deciding between brands. Sustainability held flat year to year at 31%. The only two categories which increased year to year-- and there were many that were down. The only two to increase were good value and low price. Low price increased seven percentage points year to year to 52%, suggesting that consumers, indeed, are feeling some pressure from inflation.

SEANA SMITH: And Jim, you cover a number of names in this space. Decker is one of them. We were just talking about the strong report that they had recently. I know you're pretty bullish on their outlook there. But if you take a look at some of those other names, you also have UnderArmour, Skechers, Lululemon, Levi Strauss, just to name a few of the retailers that you're tracking. Which, from your view, are best positioned? When we talk about the fact that consumers are placing an emphasis on sustainability, yet they're in the face of higher inflation, who's best positioned to win this fight?

JIM DUFFY: Well, let's talk about the impact of inflation on consumers, broadly. Inflation is a regressionary tax, so it has the highest impact on lower income consumers. Higher income consumers, we believe, better able to absorb it. And when you think about it from the standpoint of the businesses, the brands, there are a number of different dimensions that help businesses manage inflation. One is high growth. A couple of high growth names which we think can navigate through this quite well would be Lululemon and On Holdings, both of whom are selling to those higher income consumers. Deckers, who you mentioned, is also seeing strong growth.

Some of the businesses that may be more challenged are those selling to channel serving lower income consumers. We heard from Walmart last week that lower income consumers are seeing inflation in food, right? And logically, they're prioritizing their dollars towards food, and that's steering dollars towards other categories. Brands we have in our coverage with high exposure to Walmart are Contour Brands, which sells the Lee and Wrangler brands and Haines brand.

DAVE BRIGGS: Yeah, we saw an earnings report from Nordstrom which was very positive today. Again, that's at that higher end retailer. How are consumer habits changing, do you see, from these earnings and from data in recent months in terms of prioritizing brand versus price?

JIM DUFFY: Yeah, it's a great question. I'm going to take it in a little bit different direction, which is to say that I think you're seeing a shift in where consumers are allocating their dollars versus where they were spending specifically in the footwear and apparel categories during the pandemic. Now the consumers are coming out now, right? Like, there's weddings on the calendar again and so forth. And so, not surprising to see a retailer like Nordstrom's see strength as consumers look to refresh their wardrobe after having been living in sweatpants for a couple of years.

SEANA SMITH: Jim, what do you make of the over excess that some of these retailers have in terms of inventory? So they're fighting higher inflation. Some of these retailers have too much inventory, at least for now. Of course, the thought process there is that we'll see some discounts in the not too distant future. But I guess, how big of an overhang could this potentially be for the sector?

JIM DUFFY: Super interesting line of questioning. The sector for the last couple of years has enjoyed a dynamic where demand has been in excess of supply. So virtually everything has been selling at full price. You've seen disruption in the supply chain. And that's elongating the lead times to bring product, which is principally sourced in Asia, of course. And that means that brands and retailers are buying inventory with less visibility.

And so, they're speculating. And a lot of that inventory is arriving in the country, and it's starting to back up in certain categories. So you are going to see promotion creep back into the landscape. And that's going to weigh on the margins of some of these brands and retailers, in addition to the pressures that they're already seeing from higher shipping costs.

SEANA SMITH: Jim Duffy is Stifel sports and lifestyle brands analyst. Thanks so much for joining.

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