Walmart has this ‘secret ingredient’ over Target: Retail analyst

Refinitiv Director of Consumer Research Jharonne Martis joins Yahoo Finance Live to discuss July retail sales, the strength of the consumer, inflation, competition amongst retail giants, inventory, and the outlook for the state of retail.

Video transcript

JULIE HYMAN: All right, the retail sector down a whopping 20% for the year. It's lost twice as much as the S&P 500. This as major retailers broadly did report better than expected quarterly results and said consumers are still shopping despite persistently high inflation. Joining us to weigh in on the state of retail and the outlook for consumer spending is Refinitiv's director of consumer research, Jharonne Martis.

Good to see you, Jharonne. And yes, people are still shopping, but it seems like they are definitely buying different things, right? We're seeing a migration into different areas, more heavy spending on food, for example, less on home goods, for example. From what we've heard thus far, what stands out to you as the sort of dominant theme of the earnings season?

JHARONNE MARTIS: Well, good morning, Julie. This has been a very interesting week, as you mentioned. What we're seeing is that the low end consumer has lost a lot of its purchasing power. They no longer have the stimulus checks from a year ago. And on top of that, inflation is lowering their purchasing power. So as a result, they're saying closer to home, and they are doing fewer stops to the stores, whereas the middle class consumer, they are looking for value. They are cutting off those Netflix subscriptions, and instead, are getting a membership at Costco, Sam's, and BJ's to save money at the pump.

And the high end consumer, they're firing at all cylinders. We're seeing that the retailers are passing on those higher prices onto that consumer. And they're willing and able to pay full price because companies like Louis Vuitton, Burberry, and Hermes, they're all expected to post stronger earnings and revenue compared to pre-pandemic levels.

BRIAN SOZZI: All right, so Jharonne, they're trading in "Stranger Things" for bulk mustard and bulk salmon. Gotcha, check down on that one. So out of all the reports, what one report did you really like this week, that you came away saying, wow, that retailer is really executing well?

JHARONNE MARTIS: Well, Walmart has the power to do much better with the suppliers. But what really stood out in the Walmart earnings number is their membership income. This is telling us when we look at the discount sector overall, analysts polled by Refinitiv are more bullish on the discounters that sell gasoline versus the ones that don't.

And this is actually Walmart's secret ingredient over Target. Why they're doing much better than Target is the fact that their membership income grew 25.6% on top of record high membership a year ago. This is telling us that the middle class and the high end consumer, they're trading down, and they're coming-- they're opening up a membership at Sam's Club in order to save money at the pump.

But what's also great about this is that when you look at the same store sales number, not only are these customers opening a membership to save money at the pump, but they're parking their cars, and they're going inside of the store. And this is translating into strong same store sales, excluding gas. And this is what makes them perform much better than companies like Target and the dollar stores that are also discounters but don't sell gasoline. As a result, analysts polled by Refinitiv have been raising their estimates for these discounters for the next-- for the second half of the year.

JULIE HYMAN: And so they're doing it for the discounters. Let's talk about the department stores for a moment, Jharonne, because we've yet to hear from most of them. One of the ones we did hear from was Kohl's, and that was just about as terrible as it could have been, I think? So I don't know if that tells us anything about the rest of the complex, or that's really just about Kohl's, but what is your readthrough, and what are you expecting from department stores?

JHARONNE MARTIS: So when we look at the overall retail space, we're seeing that consumers are staying away from clothing and shoes and the discretionary spending. Instead, the biggest winner, not only for the second quarter, but also for the second half of the year, are going to be the restaurants, hotel, and lodging consumers. After being cooped up at home for two years, they want to experiences over things, so much so that there's only four restaurants that are expected to post negative same-store sales on top of difficult comparisons from a year ago.

And then when we dig deeper in the data, we see that consumers want to go and sit at a restaurant. So casual dining is doing much stronger than quick service. So in general, we're seeing consumers are staying away from Kohl's, TJ Maxx, Ross. They're going to be staying away from those small stores, but instead gravitating towards experiences. That's where the strength is.

And when we look at the other independent companies outside of this sector, we're also looking at Ulta that is doing significantly well because they might not be spending on clothing, but they sure want to look good when they go back to the office or go traveling. So they are buying those beauty products. Ulta is, according to some of my data, very likely to beat their earnings estimate this season and post a profit, a surprise.

BRIAN SOZZI: Jharonne, a lot of inventory. The retail sector is just awash in inventory. We highlighted Foot Locker came out this morning, inventory up 52% year over year. When does the industry just get in better shape?

JHARONNE MARTIS: So this is now telling us that we might be going back to that environment that we had right before the pandemic, which is that retailers sat on a lot of inventory and then had to provide a lot of discounting in order to move that merchandise because it's much more expensive for a retailer to sit on that inventory than to get rid of it. So as we enter the third quarter, we could see a lot of promotions.

And this might be telling because we've seen this historically in the past. This might be a sign that we might have a very promotional Black Friday this year, where we might see those average discounts go back to pre-pandemic level, which are above 40%. During the pandemic, we saw that this was a little somewhat more contained. And the discount levels were not as we saw pre-pandemic, but we might be going back to that environment, given the high inventory levels that we're seeing.

BRIAN SOZZI: Our first holiday mention of the week. I'm excited for the holidays. Big Christmas shopping fan right here. Jharonne Martis, Refinitiv director of consumer research, always good to see you. We'll talk to you soon.

JHARONNE MARTIS: Thank you for having me.

BRIAN SOZZI: Of course. All right, switching gears, security experts are--