Wall Street Horizon VP of Research Christine Short joins Yahoo Finance Live to weigh in on U.S. holiday retail spending, the state of the U.S. consumer, and retail expectations for 2023.

Video Transcript

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JARED BLIKRE: Retail sales rising 7.6% this holiday season, according to data from Mastercard, driven by discounts from large retailers like Amazon and Walmart. Joining us now to discuss if those discounts offsetting excess inventory will continue into the new year is Christine Short, Wall Street Horizon VP of Research. So, Christine, holiday's not over quite yet. We still got Three Kings Day. But what's the scorecard as we sit here?

CHRISTINE SHORT: Yeah, you just brought up those Mastercard numbers that came out, 7.6%, great year-over-year growth number. But important to note, that is down from last year. 2021 saw 8.5% growth. So 2022 certainly a robust year for US consumer spending, but we are starting to see that taper off.

And as you pointed out, to push that glut of inventory, retailers have really had to offer deep discounts. The way the holiday shopping season, Black Friday through Cyber Monday, usually works is there are some hallmark products that are put on sale that are used to attract consumers either onto a website or into a store to buy other items that aren't necessarily on sale. But we saw a wider breadth of deep discounts and, like you pointed out, might still have to continue into the new year because consumers are becoming much more value-focused.

SEANA SMITH: Yeah, Christine, what does a discounting activity look like this week because when I compare some of the promotional activity that I have seen online this week to years in the past, it certainly seems like the sales might even be better than they were pre-Christmas?

CHRISTINE SHORT: You're right. I'm seeing the same thing, 80% off. They're trying to push it through the new year, which, as you pointed out, I'm not sure we've necessarily seen in years prior or there hasn't been-- the necessity hasn't been there. But certainly this year, consumers didn't necessarily tighten their purse strings. They were still out there shopping.

We can look at JP Morgan's numbers cumulatively from Black Friday through Cyber Monday, spending was up 17% year-over-year. Transaction volumes were up 14%. So all of those numbers are great. But our last November retail sales number was down 0.6%. So November sales, which you would see a lot of those Black Friday, Cyber Monday sales coming in, were lower than expected.

Yes, you take out autos, and it was only down 0.2%. But you pointed out in your last segment, consumer electronics, some of those big-ticket items, automobiles, furniture, appliances, all of those big-ticket items that you were seeing consumer spend on last year, they did not come out for this year.

JARED BLIKRE: And, Christine, heading into the holiday season, I kept hearing it's going to be more about the experience. We did see restaurant sales rise, trips, vacations, that sort. How do we stand now? How did it turn out, the goods versus services debate?

CHRISTINE SHORT: Yeah, I think that's a trend that's happening. I think it's going to continue into 2023. Certainly spending on travel, which benefits airlines, Airbnb, hotels, restaurants, and bars, the experience, as you said, and that was a trend that was starting prior to COVID, of course, came to a drastic halt the last few years. But now consumers seem that they are going to, no matter what, unwilling to sacrifice any longer, willing to spend their discretionary income there.

I think if we're talking 2023 outlook in addition to experience, the other types of retailers, like you mentioned, that will benefit the discounters, so that's Walmart, Target, dollar stores, so Dollar Tree, Family Dollar, Dollar General, and then the bargain or off-price retailers. So we've seen TJ Maxx do really well, Ross Stores, Burlington Coat Factory.

And that's just to show not that necessarily consumers are going to stop spending, but their behavior is changing. They are trending down. They are going to those off-price retailers. And I'm talking even high-income earners. So those that would usually be targeting luxury retailers, they are pricing down to a TJ Maxx.

And TJ Maxx is also holding on to their core consumers, so those middle-income folks that make $50,000 or more a year. They're holding on to those people because remember, the main determinant of how people are spending is how they feel about their job situation. And unemployment is still at 3.7%.

The estimates for next year are that it probably goes no higher than 4.4%. That's still considered full employment. So I think there are still a consumer out there that are spending, but they just might be shifting where they direct those dollars to.

JARED BLIKRE: And you were just talking about the discount retailers, TJ Maxx doing very well over the last few months, at least in terms of its stock price. But they did have some hiccups, a lot of these discounters, because of margins, planning around inflation, which had a huge rise last year, still waiting for maybe it has inflected. But it adds to business instability and affects the ability of businesses to plan. So how much of a headwind is that for retailers, discount and otherwise, coming into the new year?

CHRISTINE SHORT: Yeah, it's true. I mean, inflation is easing, but that's certainly been an issue as they deal with higher fuel costs, higher labor costs, higher costs of goods sold. And so margins have been squeezed. One way we've been hearing about how they plan on dealing with this is no longer or maybe so long are the days of free shipping and free returns.

Many are changing their return policies, whether that means no longer offering both ways free shipping and free returns, tightening that return window. We typically see a 30-day return window, that might shorten, or charging restocking fee. And as a consumer, I hate to hear that. I'm big on online purchases and returns.

But as someone that follows retailers, I think it's actually a great idea because if you think about how many ways they get hit if they're paying shipping on both ends and then the reprocessing fee, the labor fee to get those products ready to be shipped out again or ready to be sold again. And then you just have to also think about certain retailers, specifically, , let's say fast fashion, in 30 days, is that item even going to be resold, so does it have to be resold at a discount?

So you're seeing leaders in the space, such as Amazon, shortening their holiday return window to January 14. Last year, you had up until January 31 to make returns. Once someone like that does it, everyone sort of follows suit, right? So I think you're going to see a lot of retailers cut down on how generous they had been with the return policies.