Retail is ‘feeling the Peloton perspective’ amid slowdown: Analyst

Simeon Siegel, BMO Capital Markets Managing Director, joins Yahoo Finance's Brad Smith and Brian Sozzi to discuss the retail landscape, inventories, Traeger earnings, and the replenishment cycle.

Video transcript

BRIAN SOZZI: And that's where we find our next story here, because Traeger missing revenue estimates in its latest quarter, getting burned by macroeconomic conditions and changes in spending behavior. As a result, the company is slashing its full year guidance with an expectation in the reduction of order activity as retailers seek to reduce inventories. For more on what's cooking in Traeger's future is grill master and one of our favorite analysts, Simeon Siegel.

Simeon, good to see you as always. What's going on within Traeger? I think we could agree, this is a strong brand with a strong presence in retail. But again, another disappointing quarter.

SIMEON SIEGEL: It's good to see you live. Can't wait to be there right next to you at one point, and love the puns. So listen, I think it's a good segue from where we came from because there's these two dynamics. There's how are the companies doing? Then there's what are the expectations for them in the first place? And those two are very important. Look at the screen today, I mean, everything is green. Like, Traeger's almost green.

So I think we need to internalize. And Brian, you and I, I'm sure we'll get here. You and I talk about from a Peloton perspective, I think retail is feeling a Peloton perspective. I think everyone is feeling the high that they had last year is now subsiding. And the question is when that high started. So when you look at Traeger, that's now saying, you know what? Fewer people are buying grills. And you know what? Everything we're talking about in terms of big ticket, that's playing out.

But the odd part of that call in a good way is the gross margins actually, B. I mean, that's somewhat confusing. That's the opposite of the other brands we're talking about. I mean, this is a company that from their perspective is saying we believe in the long-term viability of the brand, let's protect it. And what happens in the near term, we just need to make sure these inventories get under control.

BRIAN SOZZI: Simeon, so let's look beyond what's happening this year. By the first half of 2023, is this inventory issue with grills, is that's solved in a debt issue?

SIMON SIEGEL: Oh, I don't know that anything is going to be solved because I don't think that anything should be that quick. But what Traeger is talking about is revenue is down up to 50% next quarter, five zero. What that means, remember, big wholesale business. You and I talk about wholesale versus ETC all the time. What that means is that they're going to stop selling their product into the channel. So they're going to allow the product effectively that's there now to work its way through the system at a very big cost to their top line. That's hard to do.

I wish more companies were doing it, I wish more companies acknowledged that you know what? The environment is what it is, it's not what it was. And let's reset it so that it will be what it will be. And I don't know what I just said, there was a lot of different tenses but the point being, there are very few companies that are saying, we need to take a massive haircut to the business now even if it hurts our top line because we want to protect the future.

So will it be perfect next year? Probably not. But if what they do, if they hold to their guns here and say, we're not going to force units down people's throats, then at the end of the day, they'll be healthier for the other side. And I think that's an important point. You and I like talking about price elasticity. There was no price elasticity on the way up. It doesn't matter what your product was in the last two years, people absorbed the price hike. Well, then don't expect there to be price elasticity on the way down. That's intellectually dishonest.

And so right now, people have too many things. It doesn't matter what the price is going to be, if they don't need another grill, just dropping at 50 means you're losing the incremental.

BRAD SMITH: Right, people don't need another grill, that's what it comes down to. I mean, if you got one last year, then there's no cyclicality to it like there is a handheld device. You're not going to cycle through a grill the same rate that you would an iPhone or Samsung or whatever the case is. And so with regard to that, where can they even lean into some of the other levers that they'll pull in other parts of the business and ensure that they can still see margins retained even within that shift?

SIMON SIEGEL: I'm sorry, I'm distracted by what's happening to my right. That's a very--

BRIAN SOZZI: Look, my stomach is growling as it is. I mean, living in the moment. There we go.

SIMON SIEGEL: I'm trying to listen, but I'm just getting hungry. And by the way, not for nothing, that's part of the allure. It's this emotional content, it's they trigger thing. But anyway, that aside, listen, I think that at the end of the day, what you said, how long replenishment I think is the most important question we all have to ask, whether it's consumer staples or consumer discretionary.

If you have a short replenishment cycle, if you're a box of cereal or gas, you're very inflationary. Because it doesn't matter how much gas you bought last year, doesn't matter how much cereal you ate last year, you need to eat more. So you go back, and supply demand works its way, and the price goes up, and you take it. The longer your replenishment cycle, whether you have three-way candles from Bath Body Works, whether you have sneakers from Nike or Under Armor, whether you have a Peloton Bike or a grill or whether you have a home, the longer the replenishment, the more deflationary I think it's going to become.

And so you can either attack that and you can say, you know what? Let me try to figure out my levers, and maybe I'll try to sell the beauty of triggers, they do have pellets, so they can-- as long as we're still grilling, it doesn't matter if you don't buy another grill, there is another attachment rate. But to believe that you're going to fight a volume that shouldn't be there in the first place right now I think is dangerous.

And I think what we are seeing across retail are a lot of companies feel the need, whether it's because of people like us, in the media or on Wall Street, or whatever stakeholder's saying, you need to grow. What I hope people take away from the last several years is that certain companies were the best performing stocks in the S&P with revenues down and even dollars was up. And Brian, you and I talked about Victoria's Secret like, ad nauseum.

So you watched L Brands be the top 10 best performing stocks two years in a row by looking inward. And so focusing on that gross margin. And so that's where I think will be very interesting. And so to your point about the different replenishment cycles, I think that's what we want to understand and then figure out what will the recovery be or the replenishment be? When will people use the product that they bought? Because then they will come back. And the question is what price you're selling in at when they're ready to buy it again.

BRIAN SOZZI: Simeon, it's about to be prime time for you. Retail earnings season, I would say, kicks off in earnest next week. Now, we've gotten a lot of bad news in this space. Walmart, Target, various specialty apparel retailers, what might we hear from these companies as they report as it pertains to guidance?

SIMON SIEGEL: Yeah, so you and I didn't talk about this. So my team published a report a couple of weeks ago titled, "Red Means Go." And this was after gap, cut earnings, and the stock went up 15%. And Bath Body Work cut earnings in half, and the stock went up double digits. Like, this question of how bad expectations are versus what they could say, it seems to me the best thing you can do right now is reset the bar. It seems the best thing you can do on guidance right now is just gut it.

Now, what we did, we ran a screen and we did a lot of work suggesting who's likely to cut the guidance and then who it'll benefit, because it doesn't benefit everyone. If people don't have a negative percentage-- if Lululemon, I'm not saying they are. If Lululemon were to cut guidance, it would not be taken well. There are certain companies where they're not lying in the gutter.

And so the easiest way to think about it is if you're trading at five times earnings, well, you can cut your earnings in half and still be trading at 10 times earnings, which is relatively attractive. And what's ironic is what we found, at least from my conversations with investors, are that people are much more willing to entertain buying a stock trading at 10 times earnings than they are at five. And I think the motivation is if you see a retailer trading at five times earnings, you just don't believe the numbers. You see it trading at 10, you're allowed to determine whether it's mispriced.

And so as we walk into the next two weeks, listen, you have to determine whether it will be taken well or not. So I'm not saying this blanketly, but if you're going to cut, the worst thing you could do is death by 1,000. If you're going to cut, trough the number. Because negative expectation, macro, supply chain, everyone gets it. And then you can start building that case back up.

And what we've seen, I mean, my collective group, the retail group has actually been doing really well all things considered in the last month. And I think it's because of this final perception that if you are short, the worst thing you could get is the actual number you want today. The worst thing you could do is they guide to the number you're expecting them to put out, because then what are you playing for again? And I think it's been triggering some short squeeze.

BRIAN SOZZI: Darn good analysis as always. That's why we have you on all the time. BMO Capital Markets Analyst, Simeon Siegel. Have a good week. We'll talk to you soon.

SIMON SIEGEL: Good to see you.