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Retail sales: Target ‘laid a much bigger egg’ than Walmart, former exec says

Storch Advisors CEO, former Toys R Us CEO, and former Hudson's Bay CEO Gerry Storch joins Yahoo Finance Live to weigh in on July retail sales and how some of the biggest names like Target and Walmart fared.

Video transcript

SEANA SMITH: It's been a big week for retail. Foot Locker rounding out the sector's earnings today with a huge beat. Its shares are surging as a result. But their results though, have been very mixed when you take a look at some of the bigger names like Walmart and Target who reported earlier.

Let's talk to Gerry Storch, he's the CEO of Storch Advisors, joining us now with the big takeaways. And Gerry, it certainly has been mixed. Walmart coming out, beating expectations, although the expectations were much lower. So clearing a very low bar. Target, on the other hand, disappointing the Street. How would you-- what is your big takeaway from a number of the earnings that we got so far?

GERRY STORCH: Well, I believe the reopening euphoria is essentially over. And as we exit August into the fall, the hangover headache is beginning. And a combination of inflation and consumers simply running out of money with everything going on and then the Fed tightening and slowing the economy is starting to have an impact.

The narrative that I've seen since the retail sales report came out, for example, yesterday, I think, is just plain wrong. People say, well, they're not spending on gasoline, but they're spending other things. So the consumer is still spending. Well, when you look at what they're spending on, mostly, it's food. It's food, food, and other necessities that they have to buy which have seen significant inflation. I think Walmart pointed out double digit inflation in food, which drove their overall comp sales at Walmart.

It's not that the consumers are spending more. It's that they have to eat. And that's what we're seeing in the numbers. So the other increases were in home improvement area. I think people do feel investing in their home, even in bad times, is a good deal, a good investment, smart thing to do.

Then we saw growth on the internet. I think that's mostly because Amazon added a new Prime Day into this month, into July that wasn't there before. So when you really take a look at both Walmart and Target, you see a performance that they would have been apoplectic over, had they known they were going to have it a year ago and that, in one case, beat low expectations, as you point out, in the other case even missed very low expectations.

DAVE BRIGGS: And Gerry, Target and Walmart are often locked together. And certainly, they're both bellwethers. But how different are they in terms of getting a look at the sector and the consumer? And which one is better prepared to weather a storm ahead?

GERRY STORCH: Hey, that's a great question. Both chains were founded exactly 60 years ago, in 1962. And ever since then, it's been almost invariably true that during good times, Target does better because it's a little more of a luxe place, a little more discretionary, apparel, things like that. And Walmart does better during tough times.

And so what I would expect again is for Walmart to do better as we look to this period. They have a much more developed grocery business. They are the largest grocer in the world. And I think that's going to allow them to shine as we get through here.

The other thing that's lost, people compare these two companies and talk about is if they both laid an egg in the first half of this year. But Target laid a much bigger egg. I mean, the gross margin deterioration, for example, last quarter at Walmart was 106 basis points. The similar number at Target was 890 basis points, almost nine times worse in gross margin deterioration. Target barely made money in the quarter whereas Walmart saw a small deterioration, relatively speaking, in its operating income.

So I think Walmart is in much better shape right now. And as we get to the fall, if we don't see the consumer open up the pocketbook, it's going to be a tougher fall for Target than it is for Walmart.

SEANA SMITH: Well, it certainly has been a tough environment here for retailers. It might improve looking forward, although certainly a rocky couple of months ahead. Gerry, what does all this mean for bankruptcy? Should we be expecting to be facing, this industry be facing a wave of bankruptcies come the new year?

GERRY STORCH: Sure. As you recall, Seana, before COVID, there was a steep acceleration in retail bankruptcies as companies that were not adapting their strategies to the new era were failing at a record pace. I think we're going to see a resurgence or a return to that as we get to the holiday period and beyond, particularly among apparel retailers, department stores, and small mom-and-pop retailers who don't have the wherewithal to weather the storm.

So I'm not worried about Walmart and Target, however well or poorly they may do for themselves or their shareholders. They're not going out of business. But there are a lot of companies who really haven't fixed their strategy, despite all the bragging that they were doing when things were good for a little while, when there was a dead cat bounce immediately after the reopening. Those companies are posting really abominable results now. And I don't see anything's going to make it any better.

And some of them are going to run into credit problems. It's inevitable. And again, small mom-and-pops, one store on the main High Street, we're going see a lot of closings.

DAVE BRIGGS: And Gerry, speaking of new strategy, I'm just curious, as a former CEO of Toys R' Us, what you make of the Toys R' Us come back inside Macy's stores around the country. Do you believe this will work? And what does it mean for Macy's?

GERRY STORCH: Look, I applaud Macy's for trying new things. It's not that new, in that toys were in department stores for centuries. And in fact, if you go back to-- remember "Miracle on 34th Street?" It was a Santa at Macy's, right, that was selling toys. So department stores, incorrectly in retrospect, exited many categories, including toys, electronics, other categories, where they felt they couldn't compete against big box retailers.

But what it did is it made them very narrow, apparel-focused stores and kind of boring. And they started to age up in terms of their audience. Something like a good toy offering is helpful to department stores.

I would not blow this out of proportion. This is not your old Toys R Us. These are small spaces. They'll be lucky they do $100 million in sales or something like that as opposed to the billions of dollars in sales that Toys R" Us did at its peak. So this is a licensing company that bought the rights to Toys R' Us, that licensed the name for Macy's to use it to sell toys.

The toy industry is not going to do somersaults to make sure Macy's has the hottest exclusives or anything like that. It's not going to be a big toy destination. Nice extra pick-up item, add some flavor to Macy's that was missing. So I think it's good for them, not much of a big story really.