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Consumers are looking more miserly than expected into the year end, according to Wall Street channel checks.

Nearly across the board, analysts are voicing concerns on consumer belt-tightening, coupled with a shift away from goods consumption. While e-commerce spending was noted as on the rise nominally, as reflected in Adobe Black Friday sales data, inflation dampens enthusiasm on that front. Meanwhile, retail sales data overall indicates brick and mortar spending is slowing substantially as well.

“Inflation is pinching consumers at a record level, credit is harder to find, while job strength is the only thing better than a year ago,” Evercore ISI told clients in a downbeat note on holiday sales. “To save money, consumers are going Scrooge by trading down (cheaper items), trading out (fewer gifts), and waiting until the last minute for markdowns and deals.”

The firm added that consumers are spending more on staple categories at retailers like Walmart (NYSE:WMT), Costco Wholesale Corporation (COST), and Kroger (KR) and cutting spending on products in the electronics, sporting goods, and apparel categories. Best Buy (NYSE:BBY) and Target (NYSE:TGT) were cited as prominent retailers on the “naughty list.”

Bank of America data reflected a similar dynamic, with a particular focus on the hit to apparel sales ahead of Christmas. According to the bank data, retail spending on clothing slumped over 9% year over year in November despite Black Friday sales. Increasing spend on experiences versus goods as well as inflationary impacts were cited as factors driving the trend in addition to the overall pull-back pinpointed by Evercore.

“The ongoing rotation towards leisure services likely contributed to weaker retail spending; over the past two months, leisure services spending has outpaced durable goods spending relative to pre-pandemic levels,” the bank’s analysts said. “We expect this trend will continue through the remainder of the year as consumers travel for the holidays.”

While slowing patterns are expected to continue into 2023, the analysis pointed to pockets of opportunity in discount retail as they take advantage of elevated inventory levels across the apparel industry. As such, retailers like TJX Companies (TJX) and Ross Stores (ROST) could be big beneficiaries next year.

In the near term, Morgan Stanley advised that even a pickup in holiday sales into last-minute holiday shopping will do little to benefit the bottom line amid the promotional environment.

“Retailers are determined to enter 2023 with clean inventory positions. To us, this likely makes for an incredibly competitive holiday selling season & higher discounting/promotional activity, which again creates margin risk,” the bank’s analysts wrote. “In our view, excess inventory could plague retailers into 1Q & brands into 2Q [2023].”

After meetings with Allbirds (BIRD), Capri Holdings (CPRI), Nordstrom (JWN), Macy’s (M), Victoria’s Secret (VSCO), and Warby Parker (WRBY), Morgan Stanley remained on the sidelines for all but two names. Nordstrom was rated at a Sell-equivalent while Capri Holdings (CPRI) was assigned a Buy-equivalent rating. The latter was cited as weathering the inflationary storm pinching European consumers well while the former is viewed negatively due to rising margin risks.

“While JWN’s revenue momentum should improve from here as the tough early-shopping lap fades, weather improves, & it faces easier Omicron compares, we see risk to 4Q margins should JWN be compelled to increase markdowns in the coming weeks to ensure it meets its sales goals and holiday inventory is cleared,” the team concluded.

The retail-tracking SPDR S&P Retail ETF (NYSEARCA:XRT) has fallen over 30% in 2022 while the e-commerce-focused Amplify Online Retail ETF (IBUY) has slumped over 50%. According to Wall Street analysis heading into the year-end, a Santa Claus rally is not in the cards.

Read more on the latest retail sales data.

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