Are retail stocks due for a holiday rally or a year-end retreat?
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Concerns on inventory levels, high inflation, and shifting consumer spending habits hang over the retail space at present. As such, any optimism on the holiday shopping season, usually a boon to the space, is quite hard to come by.
Indeed, according to EY the upcoming holiday shopping season is âlikely to be the slowest since the start of the pandemicâ amid continued economic uncertainty. The accounting giantâs Future Consumer Index indicates that 43% of consumers feel as though they have more possessions than they need, while another 64% no longer feel pressured to keep up with fashion trends. 
Still, with many retail stocks slumping more than the broader market in 2022, there remains a question as to how much pessimism is already priced in.
Consumers Cut Back on Spending


Top of mind for many shoppers looking for gifts is inflation. Compared to 2021, everyday expenses in terms of food and energy costs are bearing down on consumers. In the latest CPI report, shelter, food, and medical care expenses were among the sectors seeing the steepest rise in prices.
"There has been relief from high gasoline prices which tend to aggravate consumers the most, but elevated food and shelter prices appear to be sticking around for a while as unwanted visitors," Bankrate Senior Economic Analyst Mark Hamrick told SeekingAlpha in October.
As these cost increases impact consumers, the more discretionary spending that dominates the holiday season is likely to take a big hit. 
âEnergy costs are about three times what they were in 2020, which is really going to cut into discretionary spending, especially in retail spending,â Prometheus Alternative Investments CEO Michael Wang told SeekingAlpha. âConsumersâ wallets are going to be mostly eaten up by non-discretionary spending.â
He pointed to Amazonâs (AMZN) October prime event, which reflected much slower sales than the prior sales events, as an indicator that the average consumer is holding back any urges to splurge on discretionary items. This is especially so as consumers apparently remain eager to spend on ever-more expensive travel, meaning budgets are stretched even beyond just the inflationary impact. 
âConsumers have held in well and theyâve been resilient. The major banks all stressed the strength of the consumer, for example,â Prometheusâ Wang acknowledged. âHowever cracks are starting to emerge. Consumers may still be spending, but they are now spending more than their income due to inflation.â
Still Strong Enough to Stuff Stockings?


Yet, there remains hope among many analysts that the cracks wonât totally break the consumer into the holiday shopping, allowing retail sales to remain strong at least into year-end.
Indeed, Wells Fargo recently forecast the upcoming holiday season as âThe Last Hurrahâ for the consumer ahead of a likely recession that the bankâs economists expect in 2023. As such, there could still be opportunity in the short term.
âSurely this year amid soaring inflation and deflated consumer sentiment the good times for holiday sales are over, right?,â the bankâs economists asked rhetorically. âNot according to Santaâs watch; our forecast anticipates holiday sales will increase 6% this year, which if realized would be above the long-run average of 4.6%.â
Such a rise would equate to nearly $1.5T in holiday shopping spending.
Wells Fargo added that while they remain downbeat on the turn into 2023, reports of the consumerâs death in 2022 are premature with the âuncanny staying powerâ continuing to defy the most pessimistic forecasts. Additionally, the bank expects bargain hunting to promote increased foot traffic into retail locations into year-end.
A similar dynamic was called out by Brett Narlinger, Head of Global Commerce at prepaid gift card provider Blackhawk Network. 
âConsumers can keep spending since they are shopping creatively and carefully,â he told SeekingAlpha. âPeople are looking for promotions and trying to spread out their holiday purchases. Deal-seeking behaviors are rampant, and hybrid in-store/online shopping is a smart strategy people are using to find the best prices.â
Promotional Problems


That said, promotions that prompt increased demand also entail an adverse impact on margins. Of course, most retailers are not eager to provide discounts simply to spur demand, but to clear elevated inventory levels that have become a persistent concern.

The problem has been especially pronounced for retailers like Target (NYSE:TGT), Kohlâs (NYSE:KSS), Abercrombie & Fitch, Ross Stores, Nordstrom, Burlington Stores, and TJX Companies - each of whom have signaled pursuit of increased sales to clear inventory. In electronics, both Best Buy (BBY) was also flagged by Evercore on October 19 for continually high levels of inventory.
Even Walmart (WMT), typically among the best in terms of supply chain management, was prompted to cut profit forecasts due to elevated inventory earlier in the year. The Arkansas-based retailer said in August that its work to clear inventory continues.
âExcess inventory will continue to prolong the sales season even as Walmart and other retailers scramble to cancel billions of dollars in orders,â Tiffany Yeh, Managing Director in Retail at Boston Consulting Group, told SeekingAlpha. âOther retailers, including The Gap (GPS), are planning to hold unsold merchandise in warehouses to put back on shelves later this year.â
In just the past week, these same inventory issues have hit Nike (NYSE:NKE), Under Armour (UAA), and Adidas (OTCQX:ADDYY).The latter told investors in a preannouncement on October 20 that inventory levels jumped a stunning 63% from September 2021 to 2022, casting further doubt on margin recovery in the footwear and apparel industry.
As such, the gift of strong sales provided by heavy promotional activity may feel more like a lump of coal for the bottom line.