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Retail stocks continue to measure health of economy, consumer

Interactive Brokers Chief Strategist Steve Sosnick and Yahoo Finance Executive Editor Brian Sozzi join Yahoo Finance Live to discuss retail earnings reports, the state of the consumer, and retail stocks.

Video transcript

BRAD SMITH: Citigroup analysts are watching Nike stock for downside risk after dismal quarterly results from Foot Locker. The bank reiterating a neutral rating on Nike shares with a price target of $125. The analysts citing concerns over inventory and footwear retailers on lower consumer spending could push Nike to issue gross margin forward guidance below Wall Street estimates. Let's have a broader conversation on retail with Steve Sosnick and Brian Sozzi-- also joining us here on the desk, now. Yahoo Finance's own executive editor.

All right. So Brian, I'll bring you into the chat here first. We've got some of these specialty retailers that are going to be reporting over the course of this week. We already heard Foot Locker, and now Nike getting this call on the street as well here on the day. I mean, what is this signaling about where some of the guidance expectations still perhaps need to be lowered a little bit.

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BRIAN SOZZI: Let me tell you why downgraded Citigroup this morning. No. I'm just kidding. I'm just kidding. It's really what you should be doing as an investor-- tying all the pieces together. So when Foot Locker came out on Friday, the stock was absolutely slaughtered. You know, Steve. Down 27%. Still seeing weakness this morning here. That is Foot Locker saying, we didn't deliver. We were surprised by how the consumer responded to what was in the store.

What was in these stores? Still inflationary goods. Not just in sneakers. Apparel, socks, you name it. And the consumer continued to show-- at least with the first batch of retail earnings reports. Walmart, Target, you name it-- they are not going to go out and spend too much or outside of their budgets to buy inflationary goods they view as discretionary. And in some cases, a lot of those styles from Nike, Under Armor, you name it, those are discretionary purchases that you just do not need right now.

STEVE SOSNICK: But the question I have for you Brian is so many consumer goods companies did well on their first quarter earnings because they said they were able to pass along higher costs. I'm going to say Chipotle being the big winner, but McDonald's, Kimberly-Clark, Pepsi, et cetera et cetera. But their quarter ended March 31, and now we're hearing from companies whose quarters ended April 30. And we also heard those [? U Mich ?] numbers, which were-- they stunk. Did we fall off a cliff in April? Is that possible?

BRIAN SOZZI: Well, I think Chipotle just sells better stuff maybe than a Foot Locker Nike. I mean, why not pay more for Chipotle? But we have seen consumers--

JULIE HYMAN: Well, but you need to eat.

BRIAN SOZZI: --pay more for experience. You need to eat, and that is not discretionary. And I think consumers have shown a willingness-- at least for the first part of this year-- to pay more for experiences. And going to a Chipotle, getting a very overstuffed burrito or a salad bowl is an experience. And to your point, Julie, yes, you do in fact need to eat.

Kimberly-Clark-- I would actually argue they didn't necessarily have a good quarter. You've seen a lot of consumers in this environment trade down to private label goods, and that is one thing Walmart called out in their earnings release that I think everybody should be digging more into are those names like a P&G and Kimberly-Clark losing further market share in this environment as stretch households trade down to private label goods. That's a big problem.

But if there's any saving grace, I point to a story right now on our home page by our very own Seana Smith, retail inventories. They have come way down. So if the consumer rebounds in the back half of this year-- maybe for back to school, and aiming for the holiday shopping season-- these retail stocks can start working higher again because retailers have worked down these inventories, margins could be in a better shape, earnings could reaccelerate, and those stocks go higher.

BRAD SMITH: Well, it's also the question of will it take some of the FOMO from the consumer to also come back and say, "All right, if I see a shoe that's in Foot Locker, am I concerned that they're not going to have that shoe if I go back when I'm actually ready to purchase it?" Because the intent to purchase in the time to purchase as well being taken into account with the consumer right now and how they're looking across-- OK. The FOMO that I used to have about missing out on something versus-- I just can't do that right now because it just doesn't make sense. If you speak even into the secondary market or the resale economy as well, a lot of those resellers are saying, I'm not even going out and purchasing this because I'm afraid that I'm not going to be able to find a buyer out there, too.

BRIAN SOZZI: Well, the new normal for sneaker-- and you're a sneaker guy, Brad-- is now-- it used to be what? 100, 110? Now it's 150.

BRAD SMITH: Upwards of 200.

BRIAN SOZZI: Yeah, and I am very curious when Dick's Sporting Goods reports this week how they did in their footwear department because you go into a Dick's Sporting Goods, these sneakers are extremely, extremely expensive. What, two pairs-- I mean, I have no kids-- but if two pairs of sneakers for kids-- what you're looking at what? $253, $300 maybe, depending on what you buy. It's a huge purchase.

JULIE HYMAN: I would say maybe what happened more was that some of those early results masked rather-- I mean, I don't know that anything dramatic changed in April, but at the same time, it's difficult to see like some of these retailers have been saying the second half is going to be better. When you talk about back to school, and-- it's tough to see there being a big improvement. I don't know. What do you-- I mean excess savings is getting worked down. What do you think?

STEVE SOSNICK: I do think-- You know we were talking about headwinds before, and these will affect consumers if these headwinds filter through the economy. One thing that I-- you know, one of the lessons that I learned early on in my career is it's very hard to sustain a broad market rally if retail is not participating. And I mean retail stocks as opposed to retail investors. That too, but if retail stocks are not participating, it's not a great sign for the broader economy because the consumer is still--

BRIAN SOZZI: But do you want to see Walmart shares outperform? They, in fact, have. I would argue-- I want to see Macy's stocks starting to work again. That has been an abysmal trade this year. To see Walmart shares outperforming, I would argue that is not a good economic signal.

STEVE SOSNICK: That's exactly it Walmart. Walmart is where people trade down to. That was one of the things to look for last week was are people trading down from Target to Walmart because one is perceived to be higher than the other. And it does seem to be happening. I think people are pulling back, and so in a certain extent, Walmart becomes the winner, but it's because people-- do agree that it's because people are sort of feeling crappy?

BRIAN SOZZI: Yeah. It's expensive. I mean, you saw Target and Walmart not-- calling out people are not shopping those discretionary areas-- home goods, et cetera. But look I saw the new QR code on our site right now. I encourage everybody. Download the app, scan your phone over, and get at it. Comment at us.

JULIE HYMAN: And guess what?

BRIAN SOZZI: I want to know.

JULIE HYMAN: And guess what? It's free.

BRIAN SOZZI: It's free. It's great. I want to know what are you-- who's shopping at Target or Walmart? What are you buying? Get at us. I mean, that's why we have that stuff up there.

BRAD SMITH: Brian Sozzi joining us here today. Brian, thanks for the time this morning.

BRIAN SOZZI: You bet.

BRAD SMITH: As well as Steve Sosnick who's been joining us throughout the morning.