The Investor Angle on Retail Spending, Stellantis, and Deere

In this podcast, Motley Fool analyst Bill Barker and host Deidre Woollard discuss:

• How retail spending numbers might impact the Fed.
• If Stellantis is ready to take on Big EV.
• Deere's returns for investors.

Drew University professor Chris Andrews shares his thoughts on why some companies are changing their strategies on self-checkout.

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 Feb. 15, 2024.

Deidre Woollard: Consumers spent less in January, should we worry? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Bill Barker. Bill, how's your Thursday going?

Bill Barker: It's going well. Thanks. How's yours?

Deidre Woollard: Pretty good. This has been such an interesting week for macro data. The market's been a little bit trying to figure things out. On Tuesday we had the CPI data showed inflationed maybe stickier then than expected. That of course didn't please the market, which of course because they think it might not please the Fed. Today, we've got advanced retail sales from the Sense and Spirit and the number here down, 0.8% for the month of January, market watchers, they were expecting a decrease but not this deep. Some of this of course, whether it was cold in January. January is traditionally a not great month for retail sales. But is there anything else we need to look at?

Bill Barker: It's a data 0.1, data point there, as you've already brought in a few and this one it indicates a little bit slower economic activity than hoped for. I think, that it's in comparison to say, current GP forecast for the quarter which is above 1% by the consensus, but more like 3% by the GDP now forecast, I think that this gets incorporated into that number. It lowers the GDP now, for instance, and it lowers some of the expectations. But then there will be two or three more economic reports in the next week or two that feed that and change it a little higher, a little lower, so not a big deal. You'd like to see a better number, but they can't all be good.

Deidre Woollard: But the lack of clear signal here is interesting. I looked at some of the comment sections from some of the news articles on this and people seem really divided. Some people are like, this is reflecting, consumers are tapped out, everything is terrible. Then other people are saying, like you said, this is a number, it's a blip, it's nothing to look at. It sounds like you feel like this is just, this is normal and maybe next month we'll see this go back up again to where we expect it.

Bill Barker: The balance of numbers are positive. The last GDP number was surprisingly good. The last employment number was surprisingly good, I give you more weight to those two than to this one number. There are people out there that want interest rates to drop and the economy to be humming along very well. They don't just want to have their cake and eat it too, they also want a pony and another cake. For instance, the inflation number is tracking closer to four than three on the CPI and the core CPI at the moment.

Deidre Woollard: Right.

Bill Barker: The Fed's just not going to lower interest rates that far from the target of two. It needs to come down more So the constant request such as it is from the market that, can we just have an interest rate cut now or next time or something like that is asking too much and the inflation number is continuing to trend down, but nowhere close enough to that 2% target to merit that first rate cut.

Deidre Woollard: People were so anchored to that March date. Nobody was promised March, it's just people anchored to it and they expect it when it's really probably going to be closer to the second half of the year.

Bill Barker: The Fed was fairly clear, we are expecting to lower interest rates. The consensus here is three, the market was at six, it's adjusted, and it's now at four. Still thinking that the Fed is sandbagging on how many rate cuts they're going to make but I would take the Fed's word above the market's evaluation of the Fed.

Deidre Woollard: Indeed. The other thing that I watch with this is the difference between the advanced and the preliminary numbers. Because when I interviewed Lizzy and Saunders, she talked about the jobs numbers and before the great financial crisis, there was this big difference between the the preliminary and the reported. The preliminary always gets the headlines, but the second number may be more influential. Is that something that you pay attention to the difference between those two numbers?

Bill Barker: You would expect the preliminary to be less accurate than the second cut. One of the things that's how it should work is the snap analysis of the preliminary number, is the world we live in, but it is by its design and by it's self description preliminary. It's not meant to be taken as the final analysis, but it's the number that has the most information compared to what you will hear next. The adjustment is not usually that big currently, but when there is a surprise, as there was today in the consumer spending number, the adjustment is most likely to be further in the direction of the surprise rather than an adjustment which brings it closer to the original estimate. When this gets revised, you would probably, if you're betting on past history, want to say, well, I think it'll come in even a little further down than 0.8. That may be 0.9 maybe one, not much more than that. But I'd prefer to have the final number immediately, wouldn't we all? But [laughs] that's not how it can work.

Deidre Woollard: Let's talk about some earnings because we're still in the middle of earning season. Maybe not the middle, maybe we're getting toward the end but we had earnings from, I guess we still call them one of Detroit's Big Three automakers, steel Antas. It is and also it's sort of a wholly new company, name change and really company change around three years ago. People still may not associate it with some of the brands that it houses like Chrysler and Jeep. Pretty good year, full-year results dragged down a bit by the strikes but solid report but one thing I was noticing with them is that their average price for vehicle for them, it's 53,000. That's a little more expensive than the other major automakers.

Deidre Woollard: Is this a concern if we look at the consumer getting more price conscious?

Bill Barker: Well, if you marry today's consumer number to that number, then it would be a reason to be a little bit more cautious on Stellantis. But I'm not sure that it's going to be terribly meaningful compared to all the other things that will happen throughout the course of the year including the absorption of the new employee negotiated contract, which will be a bigger effect. I think that Stellantis has given the diversity of the number of brands in there, is not overly weighted to any one particular segment of the market or geography. I would assume it has a chance of being a little bit more stable than Ford, for instance.

Deidre Woollard: Well, I think of it differently too, because the bulk of its sales are still happening in Europe. I just talked about the US brands. But we've got Alfa Romeo, Citroen, Fiat, Peugeot, Maserati. That's a bigger part of their business. They're trying to gain more market share here in the US but given that the economies in Europe, they are dragging a little bit behind where we are, both in the UK and in continental Europe. When we compare them to Ford and GM, it feels like we need to factor that in as well.

Bill Barker: Yes, they have a bigger chunk of the business in slower-growing economies. You've got the UK out there landing in a recession now, mild though it may be, and the US economy undoubtedly has had a better recent couple of years and seemingly off to a much better start this year than Europe. I think that the upside may not be that impressive, but the stability that I was referring to, they're just exposed to a lot more geographies and both good and bad that comes from that.

Deidre Woollard: Geographies and also preferences because you think about the cars in Europe. One of the things I always think about is I drive a smart car and I love the smart cars. They love the smart cars in Europe, but they did not love the smart cars in the US. You're really designing and selling for two types of markets. Over here we like our big stuff, we like our giant cars. It seems to me that Stellantis has to straddle both those worlds.

Bill Barker: Well, they're not going to introduce gigantic Alfa Romeos here to satisfy the US preference.

Deidre Woollard: I would like to see it though.

Bill Barker: I don't know. Run it through any of your preferred AI models, say I'd like to see a picture of a gigantic Alfa Romeo.

Deidre Woollard: Alfa Romeo truck.

Bill Barker: Big one out for you if you want, but you won't be able to buy one. You'll be able to buy the large vehicles that Chrysler is making and advertising on the Super Bowl. They're participating, as you say, in a lot of different preferential segments of the market.

Deidre Woollard: One of those markets that they really want is they want to share the EV market. On the earnings call, the CEO said that they're ready for the race, they're getting into it, and they're coming in as the third and maybe the fourth. If you throw Tesla in that mix too, they're coming out with those big beefy pick up EVs 500 mile range. They're going to have range extenders. Is there an advantage for them in coming in a little later? Because we've watched Ford and GM, they've tracked back some of their original estimations of how many EV trucks they were going to sell and scaled back some of their factory roll out dates. Is it an advantage to come in after you get to see what everybody else does?

Bill Barker: It's an advantage in losing less money in the early parts. Not implying that forever you'll be losing money on the EVs. But that's the nature of the start up and the more aggressive the start up is, especially if it overshoots the demand, the more money you're going to lose in the process. They're behind and that feels OK. They're not drowning in everybody having moved to EVs or hybrids yet gas prices have come down and so that always impacts the demand and the belief that you'll be saving money if you get an EV or a hybrid. It hasn't hurt them yet. They're saying the right things about developing that part of the business. They're not going to be slammed for just trying to sell nothing but internal combustion engines. But I think they're ahead of the game in terms of hitting small amounts of profitability quickly.

Deidre Woollard: Well, I think there's an interesting phenomenon I'm noticing where companies will talk aloud about EVs on earnings calls and talk about their plans, and then maybe those plans end up being a little slower. There's a little bit of a disconnect I'm feeling between what they say and then a little bit what they do.

Bill Barker: They may not have been as guilty of greenwashing and whatnot as some of the others, and I think most of their brands are not ones that you align with particular worries about the gas consumption. There are cars that spend enough time in the repair shop that you can't buy that much gas for them. You've got these very testy.

Deidre Woollard: Just the European ones, the Jeep isn't spending that much time in the shop.

Bill Barker: That's a lot of their sales. These are things that when they run, they're great, but they're very picky. Anyway, if you're buying those cars, the amount that you're spending on gas is, I think, a fairly small part of your decision making process.

Deidre Woollard: I still want an Alfa. Let's wrap up with one more set of wheels, tractors that is with Deere and Company, I always watch this company. This is a company I like because I like where they're going with technology, oddly enough, for an old tractor maker. Sales were down, the guidance was reduced, the market, of course, doesn't like that. There's this cyclicality here. I still think about this is one I like for the future of food, what they're doing with technology, this is where full self driving actually matters. What do you think about businesses like this where you know you're going to hit these cycles? How do you think about it as a long term investor?

Bill Barker: Well, in the case of Deere, you'd have to, the long term investors have done well. They've outperformed the market over the last, I think 20, 15, 10, and maybe five year periods. A lot of that has to do with the price virtually doubling in very little time during the pandemic after kicking around a couple of different plateaus over the years and then just rocketing from, I don't know, around $100 a share to around $200 or $300 a share pretty quickly after the recovery from the early 2020 March drop. Now they're the stock price that is a plateau again. It's not going to just keep multiplying on that extremely good stock returns that it had in the height of the pandemic. But it hasn't given back as much as most of the things that hit all time highs around 2021. I think it's been a great long term hold, but like all cyclical companies, you're going to do better if you happen to buy at the down part of the cycle. I wouldn't say we're quite there yet. It's off 5% today, but it's still at very elevated levels to what it was until 3, 4 years ago.

Deidre Woollard: Maybe a buying opportunity right now, who knows?

Bill Barker: Could be. If food's going to stick around, it's not a fad, eating. They've also got something that will mitigate a little bit of the downside. The cycle is turning against farm equipment, but that's not all they do. They're in heavy construction aggregates and a lot of the infrastructure bill spending in this country is yet to come. There is some that has been approved, but not much has been spent. I think that although it's not enough of a piece of the entire Deere operation, it's going to be a bit of a tailwind. Otherwise, the cyclicality of the farm equipment is going to be the biggest headwind.

Deidre Woollard: Totally. Well, thanks for talking wheels with me today, Bill.

Bill Barker: Thank you.

Deidre Woollard: We talk about a lot of stocks on the show, but it's just a peek at the Motley Fools investing universe. This year we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information, head to fool.com/epic. We'll also include a link in the show notes for you. Is self check out a failed experiment? I talked to Chris Andrews, an Associate Professor at Drew University, about his research on consumer behavior and why companies are shifting their check out policies.

Deidre Woollard: You we've had this kind of overall move toward the consumer doing more, pumping gas, ATM's now self checkout. Is this just a move toward efficiency or what else is happening as you put it the overworked consumer?

Bill Barker: Well, it's largely being driven by companies that are looking for new ways to cut labor costs and increase their profit margins, self-service freed up of gas station to add retail serve food. ATMs allowed banks to reallocate clerks to more profitable activities like loan services. For supermarkets, self-checkout lanes were intended to reduce labor costs by having customers like us perform tasks that were otherwise done by cashiers but so far that hasn't been the case.

Deidre Woollard: It definitely has not been the case. I've noticed this as I see just at local grocery stores at my local Target, the line for the self-checkout always seems to be longer than the line for the traditional cashier and I'm wondering what's happening there is that because of the inefficiency or is it more younger shoppers preferring self check out, Like what is kind of behind that?

Bill Barker: Well, while some surveys that were sponsored by retail associations have found differences in preferences for self-checkouts that vary by age or other demographic factors. Recent nationally representative survey that was conducted in 2022 of 1,000 shoppers and 100 retailers paid for by the cashier-less technology company, zip in they found that between a quater to a third of shoppers across all age groups dislike self-checkouts. But there are a number of factors that do explain why some people prefer to use self-checkouts. Some people prefer the privacy and the control over the transaction, from checking the prices to ensuring that the groceries are packed in their bags the way that they want for others it's the perception that self-checkout is faster, even though in fact it often isn't. It just feels faster because we're busy scanning and bagging our groceries, often as quickly as we can because we know there's people waiting behind us. When we go through the self-checkout lane it feels faster because we aren't standing there feeling every second pass as we wait for our items to be scanned.

Deidre Woollard: But we are bad at scanning items I don't know about you but I see so many people in line, we're not the experts, cashiers are the experts they're much faster at this. Companies have bet on the efficiency of the consumer we're not very good. Is this really a cost savings for companies?

Bill Barker: So far, it hasn't been. I think companies made a strategic blunder when they introduced self-checkout lanes because they didn't explain what was in it for customers like you and me. When Clarence Saunders introduced the first self-service store in 1916, what we think of today is essentially the modern supermarket he got the public to buy into a new way of shopping by offering customers lower prices. If shoppers were willing to take over some of the tasks that were previously done by clerks, they would get lower prices on products and so what was a revolutionary idea quickly expanded and grew. But when stores began introducing these self-checkout lanes on a large scale in 2000s, they didn't offer any clear incentives to customers and these became quickly apparent when I started doing my research in the months leading up to the Great Recession. Unsurprisingly most of the people I talked to in stores assume this was another way that businesses were looking to increase their profits by using technology to eliminate jobs. But getting back to your original question, I think companies didn't fully think through how self-checkouts would work in practice on the store floor versus on a spreadsheet where they're looking at the costs and the savings. In the early 2000s, Home Depot experimented replacing cashiers with self-checkout lanes, and they ended up driving their frustrated customers into the arms of their competitors, lows, whose stock price subsequently doubled. Other stores have discovered that if you don't stash self-checkout lanes, you also risk not only higher rates of theft but also frustrated shoppers. Most of the focus has also been on the jobs that might be eliminated but there's been very little discussion about the costs of installing, operating, and maintaining these self-checkout lanes. It might have the potential to eliminate some of these new routine low-wage work performed by cashiers but it requires more expensive technical labor to install and operate.

Deidre Woollard: Let's talk about the theft aspect of it because last year every earnings report from every retail company talked about shrink The year of shrink. Shrink is retails word for theft and so self-checker has been blamed to some extent for that. I know a lot of the companies will have cameras or have people standing around which customers really don't like. Do you think that the theft part of it, the shrink part of it is a fair assessment for what's happening with self-checkout?

Bill Barker: Well, there's been some pushback in the news against the theft numbers that were reported by, for example, the National Retail Federation. The cost of shoplifting has and continues to increase but when you look at the actual rate of shoplifting, it's tracking pretty consistently with recent years. But what I think is driving the narrative in the news is the increase in violent incidents in stores and the coverage that we're seeing through smartphones and in social media. The COVID pandemic resulting economic recession caused a lot of economic and psychological strain that I think led some to rationalize shoplifting from stores that seem to have no problem continuing to generate profits. But stores also invite higher rates of theft when they don't staff the self-checkout lanes or give customers an incentive to use them. Managers that I talked to like to emphasize that self-checkout lanes are a choice, but it doesn't really feel like a choice when there's only one or two human cashiers with long lines.

Deidre Woollard: That's definitely true. Some of this I'm wondering is some of the frustration is about the scanners don't work or things like that, or you have to twice. Do you think that's a question of, as the technology gets better consumers will be less frustrated by the experiences they're having? It sounds like no.

Bill Barker: I don't know the technology itself. One of the downsides of self-checkout lanes is that they heightened our sense of surveillance and security. In part because some of these stores were being monitored by staff standing nearby while in other stores they're starting to put in things like mirrors and video cameras, which ends up making the whole trip feel less a trip to the store more like a trip through TSA security at an airport. The other thing that we haven't really talked much about is that there's also legal implications to using the self-checkout lane. If I go to a store and a cashier mistakenly overlooks or forgets to charge me for an item that's on them in the store but if I'm caught walking out with an item I forgot to scan I'm liable for any resulting charges.

Deidre Woollard: You've got this checkout trend It's seems to be reversing the last few months like Dollar General, they said they're reversing their policy they were going to add more self-checkout. Kroger had some stores where they had only self-checkout, Walmart said they're scaling back so there's all these headlines that are saying it's a failed experiment. Is it a failed experiment?

Bill Barker: I think we're still in the early stages of what are actually several ongoing experiments in retail using technology to see how stores might reduce their costs and squeeze out more profits. Adding self-checkout lanes to stores cost the industry billions of dollars so you can understand why some are reluctant to write it off as a loss before looking to see other ways it might become profitable. But with the rate of theft through self-checkout lanes sometimes being higher than the cost of actually hiring human cashiers you can understand why some stores are starting to pull them out, but retail is not going to stop looking for ways to cut costs and increase profits. The entire history of retail can be thought of as a large, ongoing experiment with these little developments and incremental changes over time.

Deidre Woollard: Let's talk a little bit about some of those other kind of things. Because you have the self-checkout and there's also these experiments that have been made in the no checkout option. Amazon has been working on this for, I think at least a decade in my area we had the Amazon Fresh store for a little while where that was an option, but I don't think that's caught on yet so far that I've seen and there's people who have been experimenting with biometrics you pay with your Palm or things like that, or with a mobile app I know Wegmans used to have that, and I don't think they do anymore. Why hasn't there been real traction on some of this? Are we trying to solve a problem that maybe people don't want to solve?

Bill Barker: Well, the problem for example with Amazon stores is that the technology they use to track the objects throughout the store and whether or not they've been moved from a shelf and put into our cart is really expensive. It's why we haven't seen a Walmart size store with this technology it's cost prohibitive, but I think some other shoppers are also put off by the big brother aspect, the idea that Amazon is not only tracking your purchases, it's also tracking you and collecting biometric data. It's funny that you mentioned solving a problem that doesn't really exist there was never really a demand for self-checkout. We have to remember, it was wholly driven and engineered by stores, but what we saw during the pandemic was an explosion of delivery services that have continued to the present. Maybe it took some families getting used to having groceries delivered, but that was a simple service that a lot of customers actually want.

Deidre Woollard: Let's talk about that aspect of it, because you've got all these services that people maybe don't want, and you just talked about one that they do so you've got DoorDash Ubers and all those Instacart, but they're all in the store with us maybe they're there at different times, but it's not like there's a separate experience if you're an Instacart shopper, is that really what we actually need? Is that the innovation that is really what the customer wants?

Bill Barker: I think so. Since the mid-1900s, supermarkets were actually designed around cars and parking lots. But I could envision remodeling stores to accommodate things like quick pick-ups, similar to what fast food restaurants offer. We already have stores that are allocating parking spaces right near the exit designated for pickups you just park your car signal on an app that you've arrived in a store employee comes out and puts the groceries in the back seat of your car or the trunk. But with very small profit margins, stores have to be really careful about how much they change. It's not a surprise that most stores look and feel the same because they're afraid of losing their customers to their competitors. I think for now a lot of the smaller regional chains are looking at big stores like Walmart to see which way the wind is blowing.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening we'll see you tomorrow.