For qualified investors in Switzerland

Research in Action: US retail goes on sale, but the payoff may arrive after the holidays

Associate Analyst Caroline Escobar joins Director of Research Matt Peron in a discussion about how macro headwinds are weighing on retailers’ valuations. Finding the best value may require a long-term perspective.

Matt Peron

Matt Peron

Director of Research | Global Head of Solutions

24 Nov 2022
25 minute listen

Key takeaways:

  • Retailers entered the US holiday shopping season with bloated inventories due to changing consumer preferences and improved supply chains.
  • With many companies now revising earnings lower, the stocks have retreated, putting pressure on valuations.
  • For some companies, the sell-off appears overdone when viewed over a five- to 10-year time horizon. Nearer term, investors will want to be selective, seeking firms best positioned to navigate a series of macro headwinds.


Consumer staples industries can be significantly affected by demographics and product trends, competitive pricing, food fads, marketing campaigns, environmental factors, and government regulation, the performance of the overall economy, interest rates, and consumer confidence.

Consumer discretionary industries can be significantly affected by the performance of the overall economy, interest rates, competition, consumer confidence and spending, and changes in demographics and consumer tastes.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Carolyn Bigda: From Janus Henderson Investors, this is Research in Action. A podcast series that gives investors a behind-the-scenes look at the research and analysis used to shape our understanding of markets and inform investment decisions.

The holiday shopping season is in full swing, and once again, retailers face a host of challenges. But unlike last year, when supply chain disruptions and voracious consumer demand led to empty store shelves, this year, retailers are grappling with too much inventory and concerns about consumer spending. Combined with rising costs, questions are rising about which companies will be able to head into the new year on solid footing.

Joining us to talk about it today is Associate Analyst Caroline Escobar from the Consumer Sector Team, who has been covering the industry for six years.

Caroline Escobar: I would say that the shelves should be overflowing this holiday season, which should result in some great deals for consumers, but it’s not so ideal for brands and retailers.

Bigda: I’m Carolyn Bigda.

Matt Peron: I’m Matt Peron, Director of Research

Bigda: That’s today on Research in Action.

Caroline, welcome to the podcast.

Escobar: Thank you for having me. I’m excited to be here.

Bigda: Caroline, let’s maybe start the conversation by taking a step back and answering this first question, which is, how has the retail landscape evolved over the past year?

Escobar: Well, to put it simply, we’ve gone from an environment of tight supply to one of oversupply. Supply chain challenges – whether it be factory shutdowns or ocean freight delays – meant that most brands and retailers started out the year chasing inventory, often at the expense of margins. As we’ve moved through the year, we’ve seen freight backlogs come down, and now many brands and retailers are grappling with too much supply, leading to elevated promotions. Most companies had put in orders for early holiday deliveries assuming longer shipment times. But as that has reversed, we now have holiday product arriving at the same time as delayed summer and fall product, resulting in elevated inventory levels.

Another theme we’ve seen in the retail landscape this year is many companies that were COVID beneficiaries are now seeing sales pressure due to the pull-forward demand they saw during COVID. This includes used autos, furniture and electronics retailers.

Bigda: Okay, so it’s no longer taking months now to potentially buy a new automobile. Is that the idea – that dealerships have been able to stock up again?

Escobar: Right. Things are improving a bit, especially with used autos inventory, furniture, electronics. Electronics, especially, we’re seeing some areas of oversupply now, and that’s starting to happen with clothing as well.

Bigda: And is there any sense compared to other years or previous years when there’s been this inventory buildup, is it worse or on par with what we’ve seen in the past?

Escobar: It’s definitely worse than we’ve seen in the past because in this case we have some late product from spring and summer arriving in addition to early holiday product arriving. And at the same time, we have the macro backdrop weakening a bit, and so we’re expecting possibly to see some consumer demand at least, eventually, should weaken as interest rates are rising.

Bigda: Okay, so given all of, what are you hearing on the ground from retailers say about their outlook for the holiday shopping season? I was reading a recent McKinsey report, which said that in the U.S., people are primed to go all out to celebrate the holidays after years of holding back because of COVID. So, I would think that would be a positive for retailers.

Escobar: Well, from a consumer health perspective, we think that spending should be fairly healthy, similar to what the McKinsey report is saying. Most income groups still have elevated savings versus pre-COVID. I think I read recently it’s around $1.3 trillion of elevated savings. Macro readings – things like the job market – also still look healthy, which should indicate an overall healthy consumer. In addition, most banks and companies are reporting that they haven’t seen any signs of weakness in consumer spending despite the inflationary environment.

From a retailer perspective, the outlook is worsening, though. Elevated inventory means that retailers will be more promotional than usual and, in some cases, more promotional than they were before COVID. This is good for holiday shoppers, but it’s bad for company margins. The inventory situation also means that wholesalers are starting to cancel orders from brands, in some cases. So, to sum up, I would say that the shelves should be overflowing this holiday season, which should result in some great deals for consumers, but it’s not so ideal for brands and retailers.

Peron: So, Caroline, just on the back of that, how do you think about valuations in the sector? We went through this wild ride during the whole COVID episode of companies getting rerated higher in a lot of cases. Has that all reverted back? And how do you think about the valuation backdrop right now for your sector?

Escobar: We’ve seen valuations for a lot of COVID-beneficiary companies come back to pre- COVID levels. It depends on your time horizon, if this really makes sense in the near term. It does make sense because a lot of these companies were overearning during the pandemic. With the pullback and demand that we’ve seen post-COVID, many are now dealing with operating deleverage and that has pressured earnings. So, near-term earnings revisions, driven by the pandemic pull-forward demand, has driven a lot of the weakness.

From a long-term lens, I think there are cases where the market has discounted near-term volatility too much. Many of these names are trading near multiyear lows. Earnings revisions are a near-term phenomenon, and many of these businesses, like furniture retailers, for example, should return to long-term growth trajectories once consumer demand does normalize. In some cases, I even think that pandemic beneficiaries could see enhanced long-term growth, given the large number of new consumers that they acquired during the pandemic; that should drive a stronger repeat purchase cycle in the future. The tricky part is timing. While many do look attractive on valuation on a five- to 10-year time horizon, some could trade flat for a while until demand, cost, and macro headwinds normalize. Having conviction in these factors improving is key to investing in these names.

Peron: Yeah, that’s a great point, that the timing is so tricky coming into what’ll probably still be a downward earnings revision cycle, but as you mentioned, offset by markets anticipating that because valuations are lower. So, it makes tricky, when do we see the bottom and all that, but I think your perspective on them overcorrecting in terms of valuation is really interesting. And hopefully, at some point, when we get to see some stability next year, there’ll be a real opportunity here.

Escobar: Yeah, exactly. I think we’re in a unique environment and the number of external factors – a weakening macro, supply chain being delayed, China being closed with COVID – there are a lot of different things going on that are making it a lot harder than usual to kind of pinpoint an inflection in these businesses. But when we do get to that point, it should present some exciting investing opportunities.

Peron: Great.

Bigda: That was going be my follow-up question for you, Caroline, actually, which is, do you think Matt’s timeline of reaching stability within a year, is that overoptimistic or is that realistic?

Escobar: It’s hard, I think I’ve learned through the COVID period not to be too optimistic because we’ve seen, continuously, one negative event after another. You know, now we even have a war going on. So, I think it’s something to monitor, and hopefully, I think we should see some tailwinds, especially in supply chain. We’re hearing real-time that that is improving, and then other things like, China opening up, we think we should see that next year.

Bigda: So, given everything we’ve talked about and the fact that investors might need to exercise a little bit of patience in this sector, what kinds of companies do you think are best positioned to survive, if not thrive, in this environment?

Escobar: Near term, off-pricers are well positioned to benefit. The inventory overhang that I was speaking about, as well as wholesale cancelations, present great buying opportunities, so off-pricers should be able to get plenty of supply at good prices to support their own margins. In addition, when inflation starts to impact consumer demand and we see consumers tightening their wallets, that should also push demand toward off-pricers. QSR chains are another good place to be. Franchise models give some insulation to earnings from sales volatility, and they also tend to be net beneficiaries when consumers start to tighten wallets. Instead of dining out at a fine dining experience, maybe you go to a QSR instead.

Bigda: And what is a QSR?

Escobar: Quick service restaurant.

Bigda: Quick service restaurant, okay.

Escobar: Yeah, it’s like a drive-through.

And then luxury is another sector that I would highlight. Luxury tends to always show more stability than other retail models and weaker macro backdrops just given the healthier high-income consumer.

Bigda: And as an investor, are we having to pay up for those kinds of names at this point? Is the market reflecting that potential already of those types of companies?

Escobar: Not in all cases. There are still some interesting names, I think, in luxury especially, but in general, we’re seeing multiples come down across the market. The general market is still coming down in valuations. So, it’s all relative.

Bigda: Got it. So, even though those companies might be better positioned, the general sell-off in the equity market has helped to keep those valuations more attractive?

Escobar: In some cases, yes. And then I’d also say, in general, the consumer sector maybe is just underweight. So, that’s keeping valuations a little more reasonable.

Bigda: Matt, did you want to talk about the multinational environment and companies that have global exposure?

Peron: Yeah, thanks, Carolyn. I was going to ask about that because Caroline mentioned that all the geopolitical challenges – the issues in China, etc. – make for a rough landscape outside the U.S. Inside the U.S., we’re still dealing with, as is the world, still dealing with the negative, impulsive, aggressive central bank policy, which, as I mentioned earlier, could take a year to flow through. Hopefully that’s it, so I’m optimistic, maybe too much so. Anyway, all that is a long way of asking, how do you rank the relative regions in your mind in terms of the consumer trends?

Escobar: It’s tough because to your point, there are so many external factors impacting consumers right now. In general, I think the U.S. consumer is positioned better than the European consumer. In Europe, we have this energy crisis and inflation, which should pressure sales much more there than here. Here we have a pretty aggressive central bank policy that will eventually impact consumers because that is the goal. Although, it’s not impacting them as much, we still have a very healthy consumer. So, near term I think it’s possible that the U.S. consumer should be healthier and have healthier spending than a European consumer until the rate policy does actually impact and slows spending. And then in China, I think that’s a positive story whenever the zero-COVID policy starts to be tapered down. That should really benefit China spending but, more importantly, international spending as international travel from the Chinese consumer starts to open up again, because that’s such an important driver of spend for so many companies in Europe and the U.S.

Peron: Great, so we’ll have a snapback there to look forward to, hopefully.

Escobar: At some point, yes.

Bigda: So, in your view, Caroline, is it an advantage or a disadvantage to be a multinational retailer today?

Escobar: I think it’s on a case-by-case basis. It’s definitely simpler to not be a multinational retailer today. Whether it’s a positive or a negative, though, really depends on the company. Some luxury goods brands continue to see strong sales because they do have China exposure. While for some brands, China exposure is actually a net negative. So, it kind of depends on your brand’s positioning, and, I guess, demand by region and your operations. FX [foreign exchange] exposures, I would say, work similarly. For the most part, the strengthening [U.S.] dollar has been a negative for U.S. companies’ revenues. But we have seen some cases where it’s a tailwind to costs and so it can actually be beneficial. So, it’s pretty complex. But in general, I would say that being a multinational retailer is more complex today than it has been in the past. Like we were talking about, there are many external factors going on – regional lockdowns from COVID, varying macro backdrops, and the ongoing supply chain issues. So that said, I would say it’s more important than ever to invest in companies that have strong execution in their regional operations, as well as things like supply chain, etc. These companies that have a stronger foundation in their operations are positioned to be more nimble and they can execute better against an ever-changing global landscape despite their global exposure. So, we’re looking for companies with strong executional history; companies that can use the complexity of multinational operations to their advantage to execute better than competitors.

Bigda: So, it sounds like this is an area where, as an investor, you might need to be a little selective right now in order to navigate it.

Peron: Yes, you have the regional lens, as we just talked about, and then, of course, you have the subsectors. Maybe we should switch and talk a little bit about the subsectors that you like and don’t like for the foreseeable future.

Escobar: Like I mentioned before, some sectors that are positioned well near term are off-pricers, quick service restaurants, and then luxury goods. In the near term, we think that spending will generally shift back toward services. And so, I’d say other sectors that we’re positive on are things like travel; dining out, which encompasses quick service restaurants; and experiences, in general.

Peron: So, Caroline, one of the things that your team does, the Consumer Team, is really get into the line by line, almost the SKUs [stock keeping unit] of some of your companies. I know you were working on a watch company, for example, and you’re tracking every model and its uptake and its competitors. And so, can you talk a little bit about how the modeling technique that you guys use, how deep that goes in terms of tracking the fundamentals of a company?

Escobar: Well, in general, we have a thesis on a company, and we have a few drivers that we believe will really differentiate the company and differentiate our investment point of view. And so, like you mentioned, I do work on a watch company, and, in that case, they also operate in different industries; like marine electronics is another industry that they operate in. And right now, I’m actually putting together a survey, to survey different marine electronics retailers to get an idea of how sales are trending real-time and hopefully give us an edge on that business and a sense of whether that business is going to face pandemic pull-forward, similar to what the watch business is facing. So, we do really dig into the details and try to understand the drivers and as much as we can get a differentiated point of view and conviction in that view by doing real-time analyses, like tracking watch prices, keeping track of discounting and how that might impact gross margins, etc.

Peron: Yes, I think it’s really impressive when I talk to the Team and they go deep in terms of how each product is positioned for the long term, which is being phased out, etc. So, it’s one of the analytical processes we use to model our companies going forward.

Bigda: And it sounds like a pretty big task just given all the products that are out there that I’m sure many of these companies are pushing or developing. I mean, that’s a lot to keep track of and to forecast.

Escobar: Yes. We definitely do it on a case-by-case basis, and we have an understanding of what products should be more important drivers and that’s where we tend to focus our time. Just because, to your point, you can’t track every sneaker release, right?

Bigda: Try as you might, right? Just speaking of drivers, what are some of the broader growth drivers that you see for the retail sector? Is it the adoption of digital-first shopping tools? Is it certain trends in products, I guess, that you’re seeing? What are some of the longer-term trends, I guess, that you’re keeping your eye on?

Escobar: I think one thing our Team is really focused on is brands over retailers. We believe that brands are better positioned for long-term growth opportunities than retailers. Brands themselves have direct relationships with consumers. This allows them to use that data to create more efficient business models. They can real-time adjust the product they’re making and their inventory levels to have better full-price sell-through and to also please customers more. So overall, you end up with leaner inventory and better full-price sell-through, which both should support margin expansion over the long term.

Bigda: And are you seeing any acceleration in a company’s ability to respond to consumer tastes? I mean, if suddenly purple shoes are the thing, how quickly can a retailer turn around and start adjusting to that these days?

Escobar: It really depends on the product and where their supply chain is based. But we do see retailers who are actively testing new product in their stores and have systems set up where sales associates let corporate know real-time how consumers are reacting, so that they can maybe up orders on that item, real-time. So, we see it in shoes, handbags, across different items. Another thing they use is just sell-through data from apps. And so that’s another benefit of the digital transition and brands keeping more of that data to themselves rather than selling through retailers.

Bigda: That explains why I’m getting so much pressure these days to download retailer apps to my phone, I think, because I’ve never seen that in the past, but there’s definitely a reason for it today, I guess.

Escobar: Yes, it’s a gold mine. At least, that’s how everyone is thinking about it right now. Because it can cut down order times, you can be much more selective with what you’re ordering, have fewer SKUs and have better inventory turns, and a better business model.

Bigda: And speaking of products, do you have any predictions on what will be the hottest selling item this holiday season?

Escobar: I spend a lot of my time on shoe and apparel companies and one trend we’ve seen is that in casual footwear, the trends have really shifted from casual sneakers to other casual footwear, whether it’s boots or slides or slipper-like shoes. So, I think all of those types of shoes will continue to be top sellers, even with the shift back to going into the office people are continuing to wear comfortable shoes, and that seems like an ongoing trend.

Bigda: Matt’s showing us that he’s wearing some very comfortable shoes right now, too, so I think you’re on point, Caroline. Well, thank you so much for joining us today, Caroline. Here’s hoping that the holiday season is good for households, companies, and investors alike.

Next month, we’ll turn our attention to what’s ahead for 2023. Portfolio Manager Paul O’Connor, who heads our London-based Multi-Asset Team, and Adam Hetts, Global Head of Portfolio Construction and Strategy, will join us in what promises to be an in-depth conversation about what they think the biggest market drivers will be next year, and how investors should be positioning their portfolios. We hope you’ll join us.

Until then, I’m Carolyn Bigda.

Peron: I’m Matt Peron.

Bigda: You’ve been listening to, Research in Action.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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Matt Peron

Matt Peron

Director of Research | Global Head of Solutions

24 Nov 2022
25 minute listen

Key takeaways:

  • Retailers entered the US holiday shopping season with bloated inventories due to changing consumer preferences and improved supply chains.
  • With many companies now revising earnings lower, the stocks have retreated, putting pressure on valuations.
  • For some companies, the sell-off appears overdone when viewed over a five- to 10-year time horizon. Nearer term, investors will want to be selective, seeking firms best positioned to navigate a series of macro headwinds.