Everyone needs food, but they don’t need the fanciest footwear. The urge to splurge—on high-price sneakers and more—is what interests Simeon Siegel.
A senior analyst at BMO Capital Markets, Siegel has spent 15 years covering retailers and brands, winning accolades from investors and the media for his sharp observations about companies and consumers.
“I love anything that appeals to the emotional nature of spending,” he says. “When a company can turn a want into a need, and cause you to spend way more than you planned—that’s fascinating to me.”
Overspending is often on display during the holiday shopping season, although the Covid pandemic altered how that season looks. While inflation and a post-Covid preference for experiences might leave shoppers with less money to spend on goods, Siegel argues that there can still be retailing winners this December, and beyond. “The U.S. consumer will always overspend and demand value; those are the two certainties of retail,” he says.
Siegel spoke with Barron’s in mid-October about the outlook for this year’s holiday season, including Black Friday, the annual shopping spree that takes place on the day after Thanksgiving. He also shared his thoughts on
TJX Cos.
(ticker: TJX),
Nike
(NKE), and other stocks he finds intriguing. An edited version of the conversation follows.
Barron’s: How should investors think about this year’s holiday shopping season?
Simeon Siegel: Historically, the period between back-to-school and Black Friday was a time of limbo when retailers played promotional games to grab early holiday spending. In just three months in 2020, however, the balance of power shifted from consumers to retailers and brands, as inventory scarcity meant that retailers could raise their prices. That continued throughout the Covid pandemic; 2021 was the best time to be a retailer, possibly ever.
Now, the pendulum has swung back. While we are seeing the return of early holiday spending, it isn’t boosting the amount of total spending, but just pulling it forward. If anything, products could appear stale as we get closer to the holidays. In the absence of micro news, or a personal reason to spend, people focus on the macro, and right now the macro backdrop is scary, whether we’re talking about geopolitics or recession concerns.
Yet, you aren’t gloomy about the overall retail outlook.
There is a perception that retail is dead, that we’re back to 2008. But it just isn’t true. There are still companies with revenue growth, and we are seeing gross margin expansion.
Running a retail business is hard. Companies need to predict demand from consumers who are more emotional than rational. The good businesses are those that are the best demand forecasters. During the pandemic, that wasn’t enough, because retailers had inventory issues. They didn’t know what products they could get, and when. When businesses can’t forecast supply, there is little divergence in performance among companies. It is all about the backdrop—whether a rising tide will lift all boats, or a receding tide will sink them.
Now, supply is back to a level where individual company performance matters. Businesses that can forecast well and know their customers best will be the winners again. Those that can’t will become more promotional.
What are some of the likely winners?
This is the year that TJX shows the world it is gaining share not only with consumers, but also with merchandise brands. The brands want and need to unload certain products without diluting their brand equity. A brand can move a lot of units through TJX stores [including T.J. Maxx, Marshall’s, HomeGoods, and other chains]. That is preferable to trying to sell them through department stores that will discount the merchandise and broadcast promotions online. Investors applaud TJX for taking market share among consumers, but the more important shift has been the company’s ability to take increasing share among vendors.
What is the earnings outlook for TJX?
Earnings per share will climb about 20% this year to $3.75. TJX is no longer a compendium of mistakes. It is a mainstay of the retail ecosystem. This should help it continue to grow revenue in the mid- to high-single digits and grow earnings above that level, helped by slight margin expansion and share repurchases.
What has caused Nike’s decline? How can it rebound?
Two years ago, we put out a report called “DTC’s Not All It’s Cracked Up to Be,” which argued that companies pivoting to a direct-to-consumer strategy, as Nike did, don’t necessarily increase revenue. Everybody likes the idea of eliminating the middleman, but when you do that, you become the middleman, and you realize there is a reason that position exists.
Done strategically, wholesale partnerships are the most powerful thing in retail. They can be brand-elevating and revenue-driving. Somewhere along the line, we forgot that omnichannel means more than just e-commerce. That is a long way of saying that Nike isn’t abandoning direct-to-consumer, but appears to be implicitly re-embracing wholesale, to its benefit.
What does that mean for Nike’s earnings?
We expect Nike to grow earnings per share by 15% in fiscal 2024 to $3.70, on 4% revenue growth. In a blue-sky scenario, in which the company accelerates top-line growth, Nike could work its way above $5 a share in earnings. Putting a multiple of 35 times on that figure would mean the stock could almost double, but a more modest valuation of 26 times our fiscal-2025 earnings estimate of $4.22 still gets the shares to $110, up from a recent $100 or so.
Does
Victoria’s Secret
[VSCO] still have a chance to get it right?
Victoria’s Secret became too large relative to its profits, meaning that if it could sell less and charge more, it would make more money. We’re all addicted to growth, but we should care about growth of profits. Retailers aren’t tech companies. If a company’s gross margins are too low, it is worth deciding whether to pull back on promotions, recognizing that might trigger volume declines. It is easier said than done. Victoria’s Secret had diluted its brands, but pulled back and saw a tremendous period of profit-recapture. Now, it has to figure out what the balance should be.
Despite an improvement, the company’s gross margins are still below peer averages in the high 40% range, so the opportunity to sell less and make more could be a catalyst for the stock. Victoria’s Secret is trading for only six times our 2024 earnings-per-share estimate of $2.89.
Planet Fitness
[PLNT] isn’t a typical retail name. Why are you excited about the stock?
Planet Fitness is the TJX of gyms. Its membership continues to grow and set records, and it offers convenience and value—factors we look for in retail, too. The stock has been knocked down to about $63 by fears of saturation and management changes, but this is a compelling entry point.
The company had delayed gym openings. Assuming new openings are “when,” not “if”—and I favor “when”—earnings per share could grow by more than 30% this year. [Planet Fitness said on Nov. 7, in its quarterly earnings report, that it had opened 26 locations in the third quarter, and expects to add roughly 150 to 160 new locations this year.] Next year, earnings growth could be nearer to the low end of the company’s longer-term guidance of low- to mid-20% growth.
Assuming 2024 estimated sales growth of about 12% and expanding Ebit [earnings before interest and taxes] margins, I see earnings per share of $2.68 next year. Applying a price/earnings multiple of 30, below the stock’s historical average multiple of about 38, gets me to a price target of $80.
Should traditional retailers be worried about the rise of Temu and other ultralow-cost options?
These new companies have done well, but consumers are fickle. Brands have to figure out every day how to make consumers return to them. That applies to [Temu and others], too. And while some people emphasize price, others will shop for quality.
How will Big Data and artificial intelligence influence the retail industry?
Data are great but can’t be a crutch. When brands start relying on data to tell them everything, they become a little bit more boring. Data are inherently backward-looking. They are a measure of what people did. Retailing, at its best, is about creating the future. The key word is “newness.” Complementing data with the human touch, with someone who can forecast product that doesn’t yet exist—that is the holy grail. To succeed in retail, you can’t rely only on what worked in the past.
Does Black Friday still matter?
Black Friday will always be special, but it isn’t what it used to be. It went from three hours in the morning to a full day, to a full week, to a full month, to stores’ Christmas trees popping up in October.
Anything that persuades the consumer to abandon reason and embrace emotion is good for retail, so it’s no wonder brands endorse it, but how they do so is changing. The days of door busters, when there was one day of the year that saw tremendous store traffic, sales volume, and discounts—that’s a relic. Now, instead of people lining up at stores at 3 a.m., Black Friday is a time to go to the mall with your family, get a coffee or hot chocolate, stroll around, and maybe pick up some goods, maybe not. It feels more like an event than a mania.
Thank you, Simeon.
Write to Teresa Rivas at teresa.rivas@barrons.com
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