Retail's Year in Review

Motley Fool host Deidre Woollard caught up with Motley Fool analyst Asit Sharma and contributor Toby Bordelon to check out the retail landscape.

They discuss:

• How Americans are spending and changing their priorities.
• The tech replacement cycle, and what that means for Best Buy.
• A slowdown for Home Depot and Lowe's.
• Retail trends to watch in 2024.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 10, 2023.

Asit Sharma: But, the fact that there is no longer a huge amount of inventory of these low end chips sitting with manufacturers tells me that it's good conditions for those who are now looking to maybe replace a mouse that they bought during the pandemic when they were home because it's been a couple of years. Maybe that's a trend that will see some life in 2024.

Ricky Mulvey: I'm Ricky Mulvey, and that's Motley Fool Senior Analyst Asit Sharma. Deidre Woollard caught up with Asit and Motley Fool contributor Toby Bordelon to wrap up the year in retail. They discuss how spending trends changed and what that means for home improvement retailers, fast fashion, come back and why everybody wants to be Lulu Lemon.

Deidre Woollard: Let's start with one of the core stories of 2023, which is, I've called before, the unsinkable consumer. The consumer just kept spending good news, bad news. Whatever was coming its way, we just all kept spending, we kept going out. The good news for the future is that inflation is going down, but the bad news is, student loan payments are back. There are some signs of a little consumer weakness. People are saving less, they're putting more on credit cards, they're using more buy now, pay later. As you think about that, Asit I'll start with you, how much are you worried about the consumer in the coming year and how are you thinking about the consumer habits of the past year.

Asit Sharma: Deidre, I'm looking at the year ahead as one of a reset for the consumer. There's some spending exhaustion out there. You noted factors that are driving a little bit more hesitancy on the part of the consumer. Those student loan payments starting up just higher interest rates in general, which means that you've got a bigger payout to maintain your credit status if you're using credit cards to make those purchases. But I do think over the longer term, the fact that the US economy has been able to pull off somewhat of a soft landing so far is a good sign for the intermediate term, even if we hit a slight recession next year and the consumer which has been supporting the economy pulls back. Longer term, the growth of the US economy, the tightness of the job market, are factors that are positive both for GDP growth and an eventual resumption of spend even if it's late 2024, 2025.

Deidre Woollard: Toby, how are you thinking about the consumer?

Toby Bordelon: There is, as Asit says, in pastency for the consumer heading into the next year. But I also get the sense, or I have the sense, maybe this is incorrect, that a lot of the concerns we've heard about the economy from consumer sentiment, maybe not being all that great, that sort of thing might just be a product of the price side of inflation and people not thinking too much about the wage side of inflation. Look at what the UAW won in the latest negotiation with the automakers. That's a lot of extra money in those consumers pockets. When you ask consumers, are you concerned, they say, yes, I am. But it comes from the fact that you go to the grocery store and milk is more expensive. You don't maybe see the increase in your paycheck on a daily basis quite as much. But when you do go to make the spending choices, you look at your savings account like, there's some money there. I can make this happen. I do know my salary has gone up. I can make this happen. I'm optimistic, there have been wage gains, there have been income gains. We're going to kind of see that play out. Is there going to be a boom? Probably not, but I'm just not convinced that we're going to see a big pullback from consumers. They're going to be pretty stable heading into 2024.

Deidre Woollard: You mentioned something interesting there, which is that, yes, when you have those surveys, people say that they're concerned but they're still spending. There's a disconnect between what they're worried about and what they're thinking about, and their activity which has continued even as they were very worried at the peak of inflation, it didn't really stop the behavior. I want to ask one more question about 2023. I felt 2022 was the year of inventory. Every retailer was telling us, you know, we have an inventory proper, we're reducing inventory, most of them in 2023 knocked that out. But this year has been the year of shrink. People talking about shoplifting concerns of overall shrink. Shrink was the word I heard the most. Do you feel retailers are reaching the end of wrestling with that issue now as we head into a new year?

Asit Sharma: I think that some retailers handle this issue much better than others, and some retailers are concentrated in areas which you're going through more economic disruption. They are dealing with, in some cases, organized theft, and surprisingly, haven't been prepared on how to prevent that. Shrink in terms of the biggest news story this year, which is just the theft of retail merchandise is going to be less of a story in 2024. We've seen measures taken by a lot of mass retailers like Target, which aren't that obtrusive to the consumer, but they include just small steps like having security at night and closing or having more of a presence of security. Not necessarily a lot of it, just more visible. We have seen more of those irritating instances of things you wouldn't expect to be under lock and key suddenly behind the glass case with the key, you have to call the clerk to help you get a pack of shaving cartridges. We've seen some more of that with retailers, but I don't think it's going to be as much of a story in this coming year. It tends to be newsworthy just because it's something scary. Just as if you look at certain statistics of shoplifting over the past several decades, as an incidence, that's down from decades ago, but we see it much more in social media and the news. Not to say that it isn't getting bad in a few places. San Francisco has consistently pointed to as a retail area where you're seeing much more theft and brazen theft. But overall, I don't think it's going to have quite the newsworthy field that it didn't this year, retailers are handling it better. I was curious, Toby, what are your thoughts on this.

Toby Bordelon: That's right. I'm not sure it's going to be a big issue heading in next year. I like what you said about the visibility. We see it more so it seems to be a bigger issue. You can call me skeptical, but I wonder if in large, maybe not in large part, but if part of this was retailers using as an excuse for some things, our margins are going down, it's because there's shrinkage. We can just use that as an excuse in the earnings call and people will buy that. I'm sure it was it a part of it, sure. But if you highlight that as the issue that is beyond your control, it's more of a bigger social issue, it doesn't really speak to your business specifically. You can avoid blame a little bit for maybe there's declining margins or made some bad decisions you made, or you can avoid outright telling people our margin are down because our costs are up, and that's not changing anytime soon so just deal with it. This is the problem that can go away. You leave investors with some optimism and you leave them with thinking that, well, it's not entirely your fault, maybe we'll cut him a little slack. Then maybe he gives you an excuse or some cover to exit some markets or close some stores that you might have wanted to close anyway. It was a real issue, but it was also a convenient opportunity for some management teams to close down some stores, and to maybe avoid some blame on the earnings calls.

Deidre Woollard: I have heard other people express that theory as well. You're definitely not alone on that. Let's talk a little bit about the ways that consumers spent last year and what we think for next year. Because another thing that we heard over and over in retail earnings was consumer discretionary is hard hit. It was a good year for grocery, good year for smaller items, bad year for big ticket items, especially anything related to your house. Not a great year for Home Depot, for Lowe's, not a great year for Best Buy Electronics have been down. I'm thinking about this two ways, because the Home Depot and Lowe's thing, I feel maybe we're going to start to see people spending more on projects, but it's so tied to the housing market that I worry about it. But with electronics, so much of the spending was during the pandemic. We're now, a few years out, I wonder if that's going to come back. Asit, I'll start with you, what are you thinking about the big ticket spending?

Asit Sharma: I think that the big ticket spending is going to continue to be on hold. One beneficiary of that in the world of Lowe's and Home Depot are the pro contractors. They're still in demand because while bigger projects are put on hold, there's still just a dearth of new housing. What Home Depot's and Lowe's have to do now is to cater to where the demand is, and it's in those small contractors who aren't necessarily doing project work for people who own homes, but still out there working on construction projects. They're a beneficiary of that. The other side of that is maybe you're onto something, if we're not spending on those big ticket items where we spend, I follow the semiconductor industry, what are called super lagging edge fabs that make a lot of low end chips. These are the ones that are produced on 6-8 inch wafers. It's not those very small four nanometer process cutting edge chips you hear about, but the stuff that goes into consumer electronics. We were looking at a glut of those chips after the pandemic. Typically in a semiconductor cycle, when you have a glut, it takes two years to work off that oversupply. Guess what? We're about two years out of the peak of the pandemic. I'm starting to see some signs in the tiles that there is going to be an uptick of demand for electronics, again, on the part of consumers. That may be reading the picture backward. You look consumer demand first and then see what the supply looks like. But, the fact that there is no longer a huge amount of inventory of these low end chips sitting with manufacturers tells me that it's good conditions for those who are now looking to maybe replace a mouse that they bought during the pandemic when they were home, because it's been a couple of years. Maybe that's a trend that will see some life in 2024.

Deidre Woollard: Interesting. Toby, how are you thinking about it? I know you've taken a look at Best Buy recently.

Toby Bordelon: I think all it's right on that replacement cycle, maybe coming up. I was one of the households that bought multiple laptops in the pandemic as the kids were doing school from home. That was three years ago. Now, do you need a laptop or a tablet for each child if they're back in school? Maybe not, but they are getting a little long on the tooth, so they're going to look in and thinking maybe time for a new one. Let's replace one of those. We're getting to that point. Whether it happens this holiday season or not, we'll see. But we're certainly getting to that point, I think. You noted Best Buy, their earnings report was very interesting Deidre, because they broke down their categories and what they said is look, our big ticket items like our appliances. One thing Best Buy has done recently is move toward your bigger kitchen and household appliances they sell there. That wasn't moving as much. That was down a little bit. They talked about entertainment being up though. People were spending on things TVs, things like gaming consoles. We saw the Adobe analytics report, this came out recently for Cyber Monday, among the top products Xbox, PlayStations, and Nintendo Switches.

Entertainment is still receiving some spending dollars from consumers, which I find interesting. The other thing I'll note on the Home Depot lows issue, I think this goes back to the pandemic too and I think it might be less of finance issue and more of an opportunity issue. If you look at both of those companies telling us that pro business was up more than the DIY business. Well, what happens when you're working from home. You're spending more time at home. You see things that need to be done more, because you're home more. You have an opportunity to do them because you're home more. You're going to go to Home Depot, you're going to get the stuff, you're going to fix up that little thing that you might not have noticed before. Now you're going back to the office, you're homeless, so you see it less and then you have less of opportunity to do that because you're spending more time commuting. I think that might be feeding into it as well, just the lack of opportunity, the lack of desire to do some of these DIY projects is probably weighing on these retailers more so than I don't have money to do it. I'd rather spend my money on a new PlayStation, because I'm more interested in entertainment right now. I think we were partially seeing a changing consumer mix and priorities with where they're spending their money.

Deidre Woollard: Interesting because part of it too was, I think with retail the other thing we saw is where the money got pulled. Where it got pulled was toward travel and experiences and away from those big ticket items. It's not, I'm going to get a new refrigerator, it's, I'm going to go to France. Definitely, I've been wondering when that ends as well and dovetailing on that, where we saw the spending was grocery, beauty, wellness, anything that was repeatable and really enjoyed in the immediate moment. My impression is that that continues well on, especially even as the consumer maybe feels a little more pressured, it's the lipstick economy theory where people still want to reward themselves with the small step. What do you guys think about that?

Ricky Mulvey: I think the only thing that gets in the way of that Deidre is 100-200 basis points of the Fed pulling back. If we shift gears into reverse and the Fed eases, then I think that lipstick effect, which was made famous by Avon sales in the '60s, '70s, '80s, whenever there was a recession, those sales soared. I think people then pull back from the wellness and beauty spins which are still affordable. You can do it in small increments, it makes you feel happy. But if there's a general sense in the economy that interest rates are easing, you have a little bit more in your pocket. I think people pull away from that, but I don't see that happening anytime soon. If anything, I think that the Fed maintains, and by those sales of companies that deal in beauty, as you had mentioned when we were preparing for this podcast episode that they're really strong right now.

Deidre Woollard: Absolutely.

Toby Bordelon: It's Ulta Beauty to throw one out there. It had a surprisingly good quarter with healthy traffic they were talking about. They did note that the average stick, it went down a little bit but the traffic was up. People are going there more. Maybe you're seeing a little bit that when you talked about at a little bit that pullback people aren't spending quite as much but they're still going. They're going more than they were before. Overall it's a good thing. I'm not sure I see anything Deidre changes that either in the next year. I don't see any major trends that would make people pull back too much, but I think that is certainly something to look at. That falls into that experiential category we're talking about. I mean, beauty products are stuff, but it's consumable. You're buying it for that experience, not for the thing to have and look at. It's definitely that thing. I think that we're going to continue to see spending on, I think.

Deidre Woollard: Well, as we wrap up, let's talk about some trends that you're following for retail in 2024 and the companies that are leading the way. Toby, let's start with you because I know you've talked a little bit about, in our notes about show room shopping, which I think we've talked about a bit and it's really interesting to me the way that we've changed how we think about the real estate of a store, because it's partly going in there to buy stuff, but it's not, we don't buy stuff the same way we did before. I think that's changing. What do you think?

Toby Bordelon: I think it is too. There are a lot of new retailers out there, where there are store is really a place for you to come look but you don't expect to take the product out with you. That's now furniture has always been this way, higher end furniture, but you have some of the brands like Lovesac leaning into that. You go to the store, you try it out, you got people who can walk you through the various designs and the various fabrics and all that. Then you get delivered to your house sometime later. Warby Parker, another one that comes to mind, eyeglasses. You go in, you can do an exam there, you don't have to, but you can try on the glasses, you can see what they've got. Then you can buy it in store. But you don't take it. It ships from their main distribution center. The store is really just a place for you to look and see. I think we've got some companies that are embracing that. Like consumers want to see, they want to look, they want to feel some of these things and touch them. You can lean into that. With a nice combination of your online distribution network and some physical locations have a really efficient system that works for that. If you're looking for companies, what would you want to think about for that type of shopping? Well, not just the retailers, some of which you may or may not be great businesses right now. UPS. How do you get it to your house? It's the delivery, it's the logistics networks. Companies like that I think are going to perhaps benefit as this trend continues and maybe grows.

Ricky Mulvey: I'm watching a couple of trends. One of the trends that I'm really interested in is I'll just call this, everyone wants to be Lululemon. There's a movement among those who manufacture goods to be perceived as an athletic brand, a technical brand. Nike is very good at this. I'll note that Under Armour which is like a turnaround stock just now, their new CEO, Stephanie Lenartz, is really interested in bringing out the technical aspect of Under Armour's offerings. She's focusing on footwear. They have this great football boot, which in the United States we call a soccer clique. It's the Magnetic Pro. It's got like a $250 price point. I think more retailers are going to be involved in this trend where the manufacturer or brand which may outsource, obviously its footwear or other clothing is trying to go toward a premium price point, but give you a technical edge that makes you better. Nike and Adidas both have many marathoners who are using their latest technology to promote their shoes in this instance, so that's one trend that's interesting to me. Let's see what happens with it. The other is, I think fast fashion is having a moment again after supply chains broke down in COVID. It seemed like the end of that fast fashion trend. But we've seen the explosion of a new business model in companies like Tamu and Sheehan, which is confidentially filing to go public in the US. Tamu, if you don't know, this is an online version. It's cross between the fast fashion website and Tik Tok.

These are influencer-infused models which have thousands of new products that are available every day. Only a few of them are actually produced and the sales are just amazing. Tamu is on track to do $16 billion of revenue this year globally, it was just launched in the US in late 2022. It's sprung from nothing into this business, worth 10s of billions. Sheehan similarly, has sales that are just a huge magnitude, and even Amazon is starting to work with clothing retailers to make sure they don't get left behind in this. We'll see, I'm not sure the long term economics of this business model really hold up. I'm suspect, but it is a fascinating one to watch because it involves a young demographic, which is already savvy with social media. To your point, Deidre is very mobile savvy and isn't really into big-ticket spending items for as low as two bucks on some of these sites. There are little points of pleasure I think for the younger generation, but I just don't know about those unit economics over time.

Ricky Mulvey: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.