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Retail: Companies are 'forgetting that profits over revenues was the recipe for success,' analyst says

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Simeon Siegel, senior analyst and managing director at BMO Capital Markets, joins Yahoo Finance Live to discuss why retailers are struggling amid high inflation and weighs in on Under Armour's CEO resigning.

Video transcript

SEANA SMITH: Retail stocks reinforcing inflation fears this week, as big names like Walmart and Target, they posted their largest single day drops since the 1980s. For more on this, we want to bring in Simeon Siegel. He's BMO Capital Markets managing director senior analyst. Simeon, when you take a look, I guess, at some of the results that we got out, so we had Walmart, Target, Lowe's, Home Depot, each kind of showing offering different perspectives on how and where the consumer is spending. I'm curious from your perspective, how well is the consumer holding up in the face of higher inflation?

SIMEON SIEGEL: So, first of all, great to see you. Great to be here. Notice the question you asked, where is the consumer spending, I think that's so important. The consumer is spending. I think there's a lot of this mixed terminology here, where we're talking about inflation and recession, and people are thinking there's nothing. The companies you just mentioned saw revenues grow and missed on margins. And then you had TJX, on the other side of the equation, miss on revenues, beat on margins, and their stock was actually the outperformer.

So there's this really fascinating scenario here. You and I have been talking for the last two years about the companies that sold less and charged more that used COVID to pull back on promotions and focus on profits were the winners. I worry that what's happening now is these companies are giving that back. They're forgetting that profits over revenues was the recipe for success. And now they're trying to chase revenues at all costs.

SEANA SMITH: Well, Simeon, one of the stocks that you cover, Ross Stores, having a very weak day here. You can see shares off just over 23%, some warning there in terms of what we could see going forward. They cut their forecasts. What's your outlook on a stock like this?

SIMEON SIEGEL: Yeah, and so it speaks to exactly that point. So you watched a very strong differentiation between Ross Stores and TJX, both going to be off price stores, meaning they're selling, effectively, cheap clothes-- expensive clothing cheap. And you watch this distinction where TJ missed revenues, but very nicely beat on margin. Ross saw a miss on both. And so I think what we have to ask ourselves is duration. There's a host of my stocks, a host of the consumer discretionary stocks, that if we were to go to sleep for a year and wake up, a lot of them would be phenomenal returns. Problem was, you better be sleeping very heavily because you could see meaningful drops in the interim.

So when you look at a company like Ross Stores, which is a long-term share taker, but is going through this consumer discretionary pause, I think you have to figure out, what is your appetite for the next one month, two months, what can you stomach, versus, do you have a 12 plus month horizon? And that's going to be the conversation here.

But in terms of from the consumer's perspective, I think we want to be very careful about figuring out when we're associating a lack of spending versus when we're looking at what was likely a pull forward of demand. I mean, you and I have talked about this with regards to companies like Peloton and other furniture companies. I think what we're finding out is most consumer discretionary purchases were likely pulled forward over the last two years.

SEANA SMITH: Well, Simeon, you mentioned Peloton, and I want to discuss that with you, because the shares have been in an absolute free-for-all. Since the last time we spoke, we saw shares hitting an all-time low. Do you think we're going to see more selling in this name? Or what does it need to do to turn things around?

SIMEON SIEGEL: Yeah, it's a great segue way because they're all brands, they're all companies that made decisions based on levels of demand during the pandemic that likely are not what we know were not sustainable. And so the question is where we go from here. You and I have talked about how the pandemic was actually a bad thing, in my opinion, at least, for Peloton, because it convinced them to reorient their business. They laid down a lot of investment. Not for that, the company would still be growing.

So the biggest question, the reason I bring that up is the biggest question right now is Peloton is burning a lot of cash. So, in a vacuum, is there value in the Peloton community and the Peloton brand? Absolutely. The question is, what happens in between that? And we keep seeing these different capital raise events, which, thus far, they've been able to do, which is a nice vote of confidence. But every day that passes, Peloton burns more cash.

And I think it's one of this classic examples of, less can be more. And if that company can say, well, we've got three million very dedicated members, let's focus on bear hugging those brand loyalists and maximizing the profitability from them. I think there's a really interesting story. If the company is still chasing 100 million members, I think it's another-- I think then we continue to see investment in good money thrown after bad.

SEANA SMITH: Well, Simeon, another name that you cover, Under Armour, it's a name that when we take a look at what the company has been doing, they've been trying to implement this turnaround strategy. This week, we had news of a CEO change that kind of caught some people by surprise. What do you make of the management change? Is it a good idea?

SIMEON SIEGEL: Yeah, I think, listen, I think you framed it great. It took a lot of us by surprise. I think that Under Armour was not only trying to effect a turnaround, they were successfully effecting a turnaround. The company has cut off expensive investments. They've improved their endorsements. They've re-elevated the brand. Gross margins have gone up. They have sold less and charged more. So they did a great job of watching their profitability grow. And they went from a cash burner to a cash generator. They introduced their first repurchase authorization ever.

So the company is objectively in a better spot than it was before. The one thing it's not doing is putting up revenue growth, or at least, what they're guiding towards is to see revenues decline right now. And I think that's an OK thing. I think that they're the only brand, right? I know from your guest right before, we're all talking about supply chain. We're talking about inflation. Inventories are up everywhere, except for Under Armour. Under Armour has focused on improving the health of their inventory positioning, which is very good. Does the board demand growth? I guess so.

So now we're left trying to figure out what that positioning is going to be, but I mean, my recommendation is, continue doing what you've been doing for the last two years because it's really been working. What I love are the brands, whether or not revenues have gone up, you and I want to see profit dollars grow. I mean, that is growth. And they've been doing that nicely.

So what I would say is, let's focus on continuing the turnaround that they've been doing. I think they're still under earning. I definitely think they're still undervalued. But I think we, obviously, have to ask the question of, OK, what does the next CEO, where do they take them? If it's growth at all costs, that's a different story.

SEANA SMITH: Simeon Siegel, always great to get your perspective, of BMO Capital Markets. Thanks so much for joining us.

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