Retail analyst details 'the biggest risk' for sellers this holiday season

Brian Sozzi
·Executive Editor
Updated 2 min read
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In this article:

This holiday season, Santa may be dropping off giant lumps of coal to some retailers that cater to inflation-battered low-income shoppers.

"Where we see the biggest risk [is in] those retailers targeting the lower-income consumer," Bank of America Retail Analyst Lorraine Hutchinson warned on Yahoo Finance Live (video above). "You see excess inventory levels at retailers like Old Navy, like Kohl's, where the consumer is just a bit tighter."

An inflatable snowman and candy canes are part of the decorations that adorn houses in Brooklyn's Dyker Heights neighborhood, Tuesday, Dec. 22, 2020 in New York. Residents are renowned for their displays of over-the-top Christmas light decorations with life-sized Santas, reindeer, toy soldiers, sleighs and snowmen. (AP Photo/Mark Lennihan)
An inflatable snowman and candy canes are part of the decorations that adorn houses in Brooklyn's Dyker Heights neighborhood, Tuesday, Dec. 22, 2020 in New York. (AP Photo/Mark Lennihan) (ASSOCIATED PRESS)

Hutchinson sees a far better holiday season for off-price retailers such as TJX Companies (TJX), Burlington Stores (BURL), and Ross Stores (ROST).

These discount stores "will be getting a tremendous amount of high quality, well-branded inventory really starting this quarter," Hutchinson said.

Overall, the retail industry is entering the peak holiday season in a state of angst.

Profit margins are under siege due to discounting intended to move inventory that didn't sell over the summer. And even with heavy promotions, inventory levels remain uncomfortably high, as indicated in the chart below.

Too much inventory!
Too much inventory! (Bank of America)

Meanwhile, consumers are balking at price increases for apparel and accessories, and labor costs to staff stores are on the rise.

Against this backdrop, the VanEck Retail ETF (RTH) is up more than 3% in the past month, beating the slight drop in the Dow Jones Industrial average.

However, Hutchinson said most retail companies will issue conservative guidance when they report third-quarter earnings over the next few weeks. That could lead to fresh selling pressure in the space.

"We think they'll issue cautious outlooks for 4Q," Hutchinson added. "Some of it is because they brought in inventory too early. The shelves were bare last year, but a part of it is they were forecasting demand that didn't materialize."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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