Bed Bath & Beyond just wrapped up its last holiday season, analyst says
Yahoo Finance Video
Loop Capital Managing Director Anthony Chukumba joins Yahoo Finance Live to discuss Ollie’s Outlet amid the holiday shopping season, consumer spending, recessionary fears, U.S. inflation, Fed rate hikes, and the outlook for retailers going into 2023.
Video Transcript
[AUDIO LOGO]
- By most measures, the holiday shopping season finished with a whimper, as consumers cut back on discretionary purchases with recession fears raging. Let's check in with Loop Capital Analyst, Anthony Chukumba to see who won and lost this holiday season. Anthony, always great to get -- get some time with you here.
So you just put out some fresh research on Ollie's. I don't think it's a name many people on our platform are familiar with. Did they have a good holiday season?
ANTHONY CHUKUMBA: Well, remains to be seen a bit, but we are definitely concerned, largely based on the fact that we think that Ollie's just plain bought too many toys. We went to an Ollie's store right before Christmas. It was absolutely, positively swimming in toys. The toys were marked 25% off. That's a really bad sign ahead of holiday.
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So we think that's going to hurt their sales because obviously, you have to sell a lot more units at 25% off than you would at full price. We also think it's going to hurt their gross margin. So we're very concerned about Ollie's in particular and how they did over the holiday selling season.
- Based on what we have seen across retail over the course of the holiday season, Anthony, what would you say about the state of the consumer right now? Because there seems to continue to be this narrative that the consumer is healthy right now. Does that wane going into 2023? Is that already showing signs of more significant weakness than is being reported?
ANTHONY CHUKUMBA: Look, I'm not an economist. And I don't play one on TV or on the internet, for that matter. But we are definitely seeing some very, very kind of mixed signals. On the one hand, unemployment is still incredibly low. It's about 3.7%.
We're seeing very, very strong wage growth. You are seeing inflation starting to abate. You are seeing gas prices come down. But with the Fed just continuing to raise interest rates, the general consensus is that we will have a recession in 2023.
We do see the housing market you know, just falling off a cliff here. And so it's very uncertain in terms of how the consumer is going to hold up in 2023.
- Anthony, I do want to check in on two other names you track, first, Best Buy. You know, I managed to hit a couple of Best Buy stores since November. And I was just surprised by how much stuff was left in a lot of these locations, especially as they approached peak Christmas. What are you seeing from Best Buy? What did you see from Best Buy during the holidays? And how might their fourth quarter shape up?
ANTHONY CHUKUMBA: So I think that Best Buy is going to have kind of a tough fourth quarter. But I think everyone sort of knows that. I mean, one of the issues that Best Buy is dealing with, aside from the macroeconomic headwinds, is the fact that you did have this very significant demand pull forward in 2020 and 2021 due to the pandemic.
Now, here's the good news in terms of Best Buy shareholders. That's more than priced into the stock, particularly at current valuation levels. So you know, I don't think that you know, Best Buy having a tough holiday selling season is going to be a big surprise to anyone.
- And then the other one, Anthony, is RH. Now, we heard from CEO Gary Freeman a couple of weeks ago when they reported earnings. And the headline from him was that he views the housing market as collapsing. I think that statement took a lot of folks by surprise. How do you think RH did?
ANTHONY CHUKUMBA: Well, you know, you have to remember-- I mean, RH, at this point, they just don't really have a big holiday business. It's much more of kind of a year-round business, people working on big projects. Look, Gary, to his credit, he was the canary in the coal mine because he was talking about macroeconomic weakness early in the year before anyone else was.
But once again, you know, I have a very similar outlook on RH as I do Best Buy. You know, them having a tough fourth quarter is not going to be a big surprise to anyone. It's more than priced into the stock. And it's a great relative valuation play from our perspective, because I think the right comps for RH-- it's not a Bed Bath & Beyond, a name that Brian and I are very familiar with. It's not a Williams-Sonoma.
It's global luxury brands. Think of LVMH, a Kering, and Estee Lauder. And those companies trade, on average, at 24 times earnings. RH is at 15 times earnings. So you know, I think in the case of RH and Best, you know, there will be some near-term pain from a fundamental perspective. But that's more than priced into the stock. And we like both stocks long term.
- Is this Bed Bath's last holiday season? Anthony, you brought it up, not me.
ANTHONY CHUKUMBA: But you asked the question, not me. Look, the simple answer is, yes. And you know, look, we've been both been talking about this for quite some time. So I don't mean to you know, kind of beat a dead horse.
But you know, look, we don't have to go through all the things that have happened with Bed Bath & Beyond. All you need to know is that they're just simply not relevant anymore. And this really was Custer's last stand. It's going to pretty much end up the same way that it-- that it did for Custer. We will not be having this same conversation a year from now about Bed Bath & Beyond. Bed Bath & Beyond will be gone.
- There's something similar across many of the retail names that we've been discussing. And it's the inventory issues that have absolutely been plaguing them over the course of this last year. And so does that inventory issue, or that inventory overhang, start to abate? Nike, even within their earnings, they had started to talk about the peak of the inventory issues being behind them. Do you think that is also something that is a commonality that we should see or expect across some other retailers going forward?
ANTHONY CHUKUMBA: 100%. Look, here's the thing about retail inventory. It's not like wine. It doesn't get better with age. You want to be clean, particularly heading into a new year. And so we saw retailers, like a Walmart, like a Target, that were swimming in inventory early in the year get very aggressive in terms of working through that inventory.
So I think that retail-- the retail industry in general is going to be in a much better inventory position in early 2023 than they were in early 2022, which by the way, is another reason that we're you know, somewhat concerned about Ollie's because Ollie's is a company that benefits when there's a ton of excess inventory out there.
- Anthony, lastly, before we let you go, what do you think the big retail story of 2023 will be?
ANTHONY CHUKUMBA: You know, it's a little tough to say because at the end of the day, it's really all gonna come down to the macro, right? I mean, are we going to have a soft landing? Or are we going to have a prolonged recession?
Now, here's the good news. I think this sets up pretty well for retailers from this perspective, right? Either A, we have a soft landing and it turns out that retailers do better fundamentally than we thought, or even B, If we do have you know, sort of a recession, assuming it's not prolonged, retail stocks are going to start working you know, as soon as we start to get some signs that the recession is starting to abate. So it could be a year in which the fundamentals are not great, but retail stocks outperform, particularly in the back half of the year.
- Loop Capital Managing Director, Anthony Chukumba. Anthony, always a pleasure to get some of your insights and happy new year to you in advance. Great to speak with you this morning.