The luxury consumer ‘continues to spend,’ analyst says

Forrester Research Retail Analyst Sucharita Kodali joins Yahoo Finance Live to discuss quarterly earnings for Lululemon, pricing power, consumer spending, inflation, and the outlook for the economy.

Video Transcript

BRIAN CHEUNG: Well, let’s stick with those Lululemon earnings as the athletic apparel company, as Ines just mentioned, continues to see strong momentum across all categories, although inflation, again, remaining a big story for their future. Let’s bring in Sucharita Kodali, Forrester Research retail analyst, for more on this. It’s great to have you on the program. Give us the breakdown on what you thought of those earnings. Again, the stock not moving too much. It’s down today, but it’s a down day across the board. What do you see as their ability to navigate these inflationary headwinds?

SUCHARITA KODALI: Yeah, I think that the issue with Lulu is actually one that is more of a perceived issue than reality. The truth is, is that the higher income consumer continues to spend. They have not fully rebounded on other discretionary expenses, like travel. So they’re spending it on luxury items like Lululemon products. So I’m actually not seeing kind of a really negative story with respect to the luxury consumer and luxury product purchases. We expect that this will continue through much of the year, as a lot of their earnings guidance suggested.

A lot of the inflation worries, I think, are also, candidly, a little bit exaggerated. When we look at factors driving inflation, the number one factor is really gas and petroleum prices. Yet, at the same time, consumers have not pulled back on any of their driving. And the great irony about that is that people are still not commuting. So the vast majority of the travel that is happening is still discretionary.

So if inflation were, in fact, as onerous for consumers as the media and politicians are making it seem, I would suspect that we would have seen a much, much greater pullback. And what that suggests is that there is a lot more purchasing power. There’s still a lot of savings from the COVID economy that continue to fuel a lot of what is happening and that we are seeing in retail right now.

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BRIAN CHEUNG: Well, and that’s really interesting that you bring that up because the conversation around inflation seems to be bleeding into interpretations of every single retailer that’s reporting. Oh, look at them raising their prices. That’s because the demand is so high. Prices are going to continue to roll. Aren’t we in a wage price spiral?

But really, there are also idiosyncratic factors. Lululemon has different pricing power than Target does on their goods that they’re selling in the same athleisure space in their stores, right? So how much of this discussion over the 10% of the assortment getting a bump as we look into 2023 is because of its Lululemon versus its people wanting to buy athleisure?

SUCHARITA KODALI: Absolutely, Brian. And I think that this is really about corporate profiteering as much as anything. Lululemon is a relatively price inelastic brand. And certainly, given the fact that its most affluent customers continue to gain purchasing power, a lot of that is driven by the housing market and the fact that when interest rates go up, the real value of your mortgage goes down. So you seem richer. So I’m not terribly concerned about the Lululemon story.

What you raise, interestingly, about the Target and the Walmarts, though, is another factor, which is that they are– the boogeyman there seems to be kind of these higher prices, the supply chain issues. The truth is that corporate profits are at a record high. Retailers had a great 2021 from a profitability standpoint. And this is just merely supply and demand. They are charging more because consumers are purchasing those products. If consumers were to pull back or trade down or a substitute, we would not be seeing the inflation that we are seeing. And I think that that is really the guts of it.

And I think that toward the back part of the year, savings can’t last forever. So we likely will see that substitution that should be happening. But for now, consumers haven’t pulled back. And that’s part of the reason that retailers continue to raise their prices, whether at the high end or at the low end.

BRIAN CHEUNG: The other thing that’s kind of interesting about pricing is inventory, right? That’s a reason why we’ve heard perhaps there could be discounting going forward because the over inventorying that was done to get over the supply chain hump may have actually been too much. Inventory up 74% year over year at Lululemon, but again, they’re saying, we can still implement price increases over some, not all, of our products. So do you see Lululemon getting over that inventory glut easily? We know that they said on the earnings call, they expect that to actually tick up again further in the next quarter.

SUCHARITA KODALI: Right, and there are a number of things that could be happening. A lot of their product is Evergreen, so what they may be doing is just holding on to that inventory if it doesn’t sell. They’re not as seasonal. It’s not like– it’s not a super on-trend retailer, like H&M, where if you don’t sell this season, that could be problematic for them. So even if they have higher levels of inventory, it could be that they are trying to insulate themselves against supply chain risk. They are also a seasonal retailer.

So they really likely want to make sure that they are in good shape for Q4. And having higher inventory really is crucial to that end. But I’m not terribly concerned about them having too much inventory. A lot of their product likely has the ability to last more than a season. And it is not merchandise that is, for lack of a better expression, perishable.

BRIAN CHEUNG: All right, Sucharita Kodali, Forrester Research retail analyst, thanks so much for taking the time today. And have a great weekend. Appreciate it.