Barclays has downgraded the retail sector to Neutral, explaining that promotions suggest “weakening demand.” Barclays consumer discretionary senior analyst Adrienne Yih joins Catalysts to discuss the state of the retail industry and what it signals about consumer spending.
“Last year, it was all about cleaning up the inventory. And so there were a ton of promotions last year, and rightfully so because these companies are trying to get rid of that inventory. We are seeing the same level of promoting now that the companies have clean inventory. So what that basically means is they’re doing it for an entirely different reason,” Yih explains. “They’re doing it to drive and stimulate traffic and conversion. And that’s clearly an indication that the consumer is very choiceful and pulling back.”
While the consumer is more conscious about their spending choices, she notes that this no means indicates an “unhealthy” consumer as there are record lows of unemployment.
In June, Barclays downgraded Nike (NKE) to Equal Weight, and Yih breaks down the reasoning behind the move: “Each quarter it would seem that we were coming into the earnings with what we thought was the company’s sort of one to two-year strategy. What we found out at one point it was to go to DTC (direct to consumer) from wholesale, then it was to go back to wholesale, then it was to franchise manage in the most recent quarter, meaning that they’re going to hold back product from the DTC channel. So it’s very hard for us on the outside to analyze a constantly kind of moving target.”
She adds that at the end of the day, while Nike is a growth company, “we weren’t willing to kind of be that patient with it at this point in time.”
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