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Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see her.
We are going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show: it will have a look at the outlook for the retail sector as we get into the real sake of the holiday shopping season with Chris Graja from Argus Research will join us.
And in today's WebBroker education segment, Caitlin Cormier is going to show us how you can screen for different types of ETFs using the platform. So here's how you can get in touch with us.
Just email moneytalklive@td.com or you can fill of that your response box right under the video player here on WebBroker.
And before get to our guest today, let's get you an update on the markets.
We do have some green on the screen. It's a little more modest on the side of the border. We are just hanging in with the TSX composite index of a little shy of10 points, although we are noticing a move higher in the price of crude today, that Keystone Excel link that we heard about last week. The pipeline is still closed with no timeline for reopening.
It seems to be pressuring her price is a little bit higher. The American benchmark, WTI, is up to the tune of 3 1/3% right now. So there is some money moving in some energy plays, including Cenovus. Let's check in on them.
They are of 2442. Their weakness in some of the mining names, including First Quantum minerals, at this hour down about 4 1/2%, 31 bucks and $0.20.
South of the border, their green on skin is a little bit firmer. It's going to be a pretty big week.
We're heading into the holidays, maybe you are winding down.
US inflation reports coming up tomorrow morning.
At the same time, at the US Federal Reserve, on the heels of that report me up for morning, heading into today meetings to make the next rate decision, this is going to be a pretty big week for investors. We will have it all covered for you at MoneyTalk and, of course, you don't want to lose focus alone. The S&P 500 up about half a percent, Little 520 points.
The tech heavy NASDAQ holding up against the broader market, up about… There was a bit on Wall Street, we want to check in on Exxon.
Hanging a little more firmly, 105 bucks and change. We will call that up 1.8%. That's your market update.
December is one of the most important times of the year for the retail space, but with inflation and rising prices on the minds of many consumers, will this holiday season see disappointing sales? Joining us now for his view is Chris Graja, Senior regional analyst at Argus Research. Chris, welcome to the program.
Great to talk to you about this topic at this time of the year.
What are the catalysts right now that might separate some success stories for some perhaps not so successful stories this holiday season?
>> Yeah, that's a great question.
To put catalysts in context, the reason they are so important is everybody on Wall Street, we'll build our models and price in earnings, we price in long-term growth rate, we kind of assess the risks, the management.
And then you need a change in order to push the shares to be worse above or below what's in your model.
And I would put the catalysts right now probably three categories.
To remember them easily, innovation, relevance and strength.
And the reason innovation is so important is, you spoke about in the introduction, companies need pricing power to overcome all of the inflation that's out there.
And what we see right now is the companies that have innovative products or have invested in doing unique things have the greatest pricing power and the greatest ability to preserve margins.
So as earnings reports come out in the fourth quarter, the question is going to be, who was able to continue to drive sales? The questions will be about elasticity.
So when you raised prices, how much did your sales trail off? And then how much margin to companies to sacrifice?
and above expected results on any of those things could be positivefor the stock. In terms of relevance, relevance translates into store traffic.
And mathematically, in the retail world, same-store sales which are a main driver of how people look at the retail stocks, is a combination of traffic and ticket.
And over the long term, ticket is kind of a combination of a bunch of things, but some of it is pricing and it's going to be hard to do on a long term.
So companies need to draw people into their stores, whether it's with a treasure hunt atmosphere, whether it's education, whether it's new product drops, as companies like to say, whether it's convenience.
So all of those things, particularly in this environment, where people are going to be increasingly challenged in how much they can pay is how do you draw people into the stores? If you get them in the store and you get them excited, given that people only have so many dollars to spend, how do you get more and more of those scarce dollars?
Maybe it more than they intended to spend, with excellent merchandising. And the third want to talk about right now is financial strength, and this can be both a positive catalyst and an anti-catalyst. In a tough market environment, showing that you have the ability to raise dividends or to be a little bit stronger in terms of repurchasing stock, those things are all very important and positive. With interest rates higher, and all of us looking at companies balance sheets, a company that has debt to rollover and the possibility of doing it at several basis points higher than they did previously, the possibility that somebody, when rates were low, may have been a little bit more aggressive and took on floating-rate debt. Now that floating-rate debt is going to be a lot more expensive.
And the ability to make acquisition, companies have been down, there have been challenges to some of their business models, so the companies that have a warchest, if you will, the ability to make a smart acquisition, there could also be a catalyst going forward and then maybe one tactical loan.
As we look to the end of the year, one of the questions is going to be, whose inventories are clean? The big change story this year was that we went from at the beginning of the year, everybody was scrambling, scribbling with supply chain issues, trying to get their inventory stocked up. Then, consumer demand kind of turned on a dime and it became, how do we clear through all of these inventories? So I think investors want to see companies go into Q3 with clean inventories, so that means a couple of things. One is there is a looming markdown risk on the balance sheet.
And number two is that companies, if they have the old merchandise out, they will have the ability to flow in new merchandise.
And that's become particularly important for the day after Christmas.
Shoppers gift cards are an increasingly popular gift item. Some people go into the stores with their gift card, the best retailers want to have fresh, new merchandise out so that people are buying new things, ideally at full price, rather than just combing through the discount racks.
So those are some of the near-term catalysts and ways to think about them right now going into next year.
>> So with those is our signpost, you have a company that perhaps innovating, you have one that still relevant to customers, you said, we are watching our dollars pretty carefully, making sure we want to spend them here, they got that financial strength. What is the overall atmosphere for holiday shopping look like?
It sounds like there are some names that are better position than others, but in the end, the shopper has to show up.
How are we feeling about the season so far?
>> Right now, my forecast for holiday shopping is for a 5% increase over last year.
The National retail Federation, which is a big US trade group, is in the 6 to 8% range.
So I will give you the pros and cons. So when the pros, employment is still relatively strong.
Household balance sheets have come out of the pandemic at an aggregate level in a pretty strong position, and one of the things we've seen covering the sector for a long time is that people generally want to make the holiday special for the people they care about, and that's probably even more truecoming out of the pandemic. People want to get back to normal and feel that things are normal and kind of happy holidays like the ones we used to know.
On the con side, the challenges our first that inflation is causing people to spend more and more of their money on food and staples and basics. So that left less money available for discretionary purchases.
And those things have more margins for the retailers.
So you kind of have to go through the forecast line by line and category by category. So for me, I got grocery stores up seven for the holidays. And it's normally a very slow-growing category, it two or 3%, but because of all the inflation and the necessity of buying groceries and probably the additional advantage of dining at home being cheaper than eating out at restaurants, I think you're going to see stronger growth than we would normally see at grocery stores.
I have about 4% in general merchandise, some of that is inflation.
Some of that is staples.
But I mean that's a bit of a question but I think 4% is a reasonable number. I think e-commerce is probably the most difficult to forecast. My forecast there is for a 5% increase. It's been growing faster than that, but we are mapping really strong numbers in the past few years. And the other thing I think we are likely to see is that people are going back to stores. You know, after many years of people sitting on the couch andbuying online, you know we seem to see the Black Friday weekend, the return to stores in the fact that people just want to get back to the experience of being in stores and buying things that way.
So I'm at 5% and we will take a look at that as the season followed.
>> Interesting stuff in a great start to today show. We are going to get your questions about retail stocks for Chris Graja just a moment time. A reminder, course, you in touch with us anytime. Just email moneytalklive@td.com or you can so that your response box under the video player here on WebBroker. Now, let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Microsoft is entering into a 10 year cloud computing deal with London Stock Exchange Group. The agreement will see the software giant take a nearly 4% stake in the exchange operator.
And over the course of that decade, LSEG group is committing to spending at least $2.8 billion in Microsoft cloud products. Mike is off says advances in cloud and artificial intelligence will transform how financial institutions carry out their work.
Shares of Horizon Therapeutics or the spotlight today.
The drugmaker is being acquired by Amgen in a deal valued at almost $28 billion.
The deal will see Amgen add several already approved drugs with offerings, strengthening its rare diseases portfolio.
We have some dealmaking today in the outdoor grilling space. It Weber is being taken private by BDT capital part in a deal valued at $3.7 billion. The maker of grills and growing products is the deal has been approved by the board and it expects the transaction to close in the first half of the new year.
We are up about 10%.
The S&P 500 is also in positive territory. A pretty big week, we are going to get the latest read on US inflation tomorrow.
And then the Fed tomorrow as well heads into its two-day meeting to decide what to do with interest rates going forward.
The market consensus seems to be 50 basis points but all will be known on Wednesday.
We are back now with Chris Graja. We are taking your questions about retail stocks so let's get to them. Our first one here, Someone wants to get your view on Home Depot.
>> Sure.
And maybe I'll lump Home Depot and Lowe's together in here.
So a home improvement retailers, the big question right now is how much are they going to be affected by the slowdown in the housing market? So the bull case first.
The bull case is that a lot of the purchases that people make at home improvement stores are out of necessity rather than discretion. So if your refrigerator breaks, if you have to clean up your backyard or do some painting, a lot of those things are both small ticket and relatively necessary at the time.
The other thing that's kind of working on things is that a lot of homeowners… The increase in mortgage rates is putting a lot of people out of the market, so one of the things I'm looking at is that if people are going to stay put and if they've locked in a mortgage rate at say 3% or very low level, if they are employed, they are going to have the ability to fix up their existing home.
The other thing that's a potential catalyst on the positive side for Home Depot and Lowe's is that when you… So a lot of companies, a lot of retailers, sorry, a lot of individuals are going to continue to fix homes that are aging, that are 50 years old.
The average housing stock in the United States is about 50 years old. They are going to continue to make improvements there.
On the calm side, the worry is that with the slowing economy, with more inflation and the fact that people have been spending more and more on their homes, during the pandemic while they were home, they will have less money to spend in that sector. And I guess where I differentiate Home Depot and Lowe's, Lowe's is going through a bit more of a turnaround.
Their new CEO, new-ish CEO, is focusing on margins. For a long time, Lowe's was really good at driving the topline, but not necessarily getting the bottom line.
They showed a much stronger commitment to that. Home Depot has a bigger percentage of the business and serving professionals. So they are about half pro-and half do it yourself.
And that pro-business is probably seeing the stronger demand.
Lowe's said last week that when they speak to their professional customers, that part of the market is still seeing pretty strong order marks for demand going into next year.
So when the bull case, maybe the sector is not as discretionary or as volatile as people think.
When the bear case, I think people are a little bit concerned number one with a slowing housing market, the less housing turnover and the fact that people may not have as much discretionary income to do major remodelling projects.
>> Those two scenarios lose lead out there are sound like the discussions I have around the dinner table.
My wife says, we need to do this and this, usually about the master bathroom, and I'll say, there could be tough times ahead.
let's take another question from the audience. This one is on the outlook for retail behemoth Walmart. Would you think about this one?
>> Walmart is a stock on positive on.
at this time of year, they arein the value business.
They have low prices.
A lot of people are turning to them because they have to make ends meet.
One of the things that's been challenging for Walmart is that their customers are spending more money on groceries. So the good thing is that Walmart has that grocery department.
The bad thing is that they get a lot of their margin from discretionary products.
So that part of the business has been a little weaker, but they are very efficient. They are improving their online capabilities and one of the things they did that I think is very helpful as they kind of looked aware they want their international business to be over the next 15 or 20 years, so the focus is on Canada as one of the important countries, India, China and Mexico, and I think that will eventually be very beneficial for Walmart in the future.
Again, probably the challenge, if you're looking for risks, is while they serve a pretty broad demographic, they do have a bunch of customers who are more value focused and are probably feeling the pinch more and more of what's going on. The last time I visited the store over Black Friday weekend, one of the things we saw was that the front alley of Walmart was a very basics, it wasn't discretionary, televisions and things, it was things like rice and beans and cans, flour, cooking oil.
So very basics to help people meet their needs. So that should drive traffic but may be less of it will be in the discretionary categories.
> Chris, he pointed to the fact that the discretionary is where some of the margin comes from. I think in years past, before the upheaval of the pandemic, the inflation are trying to battle right now, part of Walmart story was that because they are so big and they have so much influence when it came to the supply chain was that they could pressure down some prices. Do they have that power in an inflationary environment like this or they feeling like everybody else?
>> I think part of it everybody feels.
on the other hand, I think Walmart is trying to be more efficient.
One of the things they did last year is they were able to use their clout to charter ships, to make trucking more efficient.
But by buying so many things, retailers being a major customer, they are in a position… Maybe it's on a logistics to make it win-win. Maybe you deliver products to one spot for Walmart or a number of distribution centres rather than individual stores.
So I think based on their size, they have the ability to negotiate and try to find some ways to take friction out of the system and, ultimately, continue to build relationships so they are getting retailers the best products but they are feeling a little bit of pressure.
One thing we see in the retail market is that companies are using their own private label products.
Walmart has them, Costco has them, Kroger has them.
And they can use their private label products to fill wide space, where other products might not be on the lower price and, or to use their own products as a bit of a lever to get some of the big consumer products companies to negotiate with them a bit.
>> Interesting set. As always, at home, make sure you do your own research before you make any investment decisions.
We will get back to your questions on for Chris Graja on retail stocks in a moment's time. It just reminder that you can get in touch with us at any time. Email us at moneytalklive@td.com. Now let's get our educational segment.
If you are looking to screen for different types of exchange traded funds, WebBroker has tools which can help.
Caitlin Cormier, client education instructor at TD Direct Investing has more.
>> Today, we are going to explore the world of ETFs. We are going to take all of the ETF that are out there on the market and find a way to narrow down those ETFs to those that are meeting the specific criteria that we are interested in researching, and then how we can compare those funds to one another.
so let's start by hopping into WebBroker. What we are going to do is you're going to click on the research button and we are going to go under tools and click on screeners.
now, usually when you land on this page, we are looking at stocks, but today we are going to go all the way over to the ETFs tab and we are going to create a specific screen for ETFs. So we are going to click on the create custom screen button and here's where we can input the different criteria that's important to us when looking for ETFs.
Now, there's tons of different options for you to explore in the screen, but for today, I've chosen a couple. So I'm going to choose fund category and we are also going to choose index specifically.
So as I scroll down here, I'm going to choose show only index funds and for fund category, let's go ahead and use Canadian equity.
So I'm just going to scroll, here we go, Canadian equity. So what we can see is that there is 110 Canadian equity ETFs and out of those that are ETF funds are 48… Sorry, index funds, there are 48. We are going to dis-include mutual funds for today so we see 46 of them are ETF's. We are going to click to view 46 matches. So this is going to show us the results of that to criteria that we put in so we can see all of these are Canadian equity ETFs that are index funds as well.
To narrow this down a bit and get some funds to compare, I'm going to go under the profile and I'm going to choose equity style. So I want to make sure the ETFs when comparing are similar.
I went to click here and I'm going to look at five different large-cap blend ETFs.
Before I move from the screen, I'm going to mention that there is a lot that you can look at to simply from the screen. As you will see, just by clicking around.
But today, we are going to look at the comparison tool.
So I'm just going to choose five different ETFs here just kind of randomly and click the compare button.
So the compare screen is a really great opportunity to be able to see these five different ETFs side-by-side and really get some specific information on each one.
So as we scroll down, we can see some summary information. So we've got net asset value, we've got volume, so how actively these are traded, the assets under management, MorningStar ratings, MER or management expense ratio, maybe you are looking for an ETF that's going to pay a distribution so you can see that right here.
We can close out and move on to profile, see how long the fund has been around for, how long the manager has been with the fund.
If we click on performance, we can see annualized returns as well as calendar returns and compare these funds at side-by-side.
And we also have risk information here. So we can see all these different risk as measurements, compare them side-by-side with these five ETFs that we have.
So additionally, we also have holdings allocations which of course we can assume most are gonna be Canadian equity given that we are looking at Canadian equity funds and majority invested in Canada. If we decide during this process that one of these ETFs isn't quite cutting it, we can go ahead and actually drop it off our criteria, client of clean up the screen a little bit to make it a little bit easier to see those still in contention for future research.
So that is one of the great tools that we have in WebBroker to help you not only research to kind of find it different ETFs that might be to your liking but then also take them that step further and use the comparison tool to really kind of leave through and find out which one might be best for you.
For additional information on WebBroker and all of the different resources we have, please check out the learning centre in WebBroker.
>> Our thanks to Caitlin Cormier, client education instructor at TD Direct Investing.
Now before we get back to your questions about retail stocks for Chris Graja, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. Even sent a email anytime@moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.
Just write in your question and hit send. We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with Chris Graja, we are taking your questions about retail stocks.
Can we get your take on Target, Chris?
>> Sure.
one of the things that's been a real positive for target throughout the pandemic is that they havemade good investments that have allowed them to be more and more efficient and serve customers better.
Their typical customer is busy. She's, you know, on a bit of a budget but also on some style and a lot of the growth in their sales has been through sort of one day or kind of quick access things. You place an order online, you pick it up and store or you curbside pickup. That was very important during the pandemic.
It was very, very popular. One of the reasons these things are important is because of margins. So one of the big things in retail right now is the cost of shipping is a drag on company's gross margins.
They are paying out more and more.
So by the companies like Target being able to fill Internet orders either in the store or in the parking lot, days save a lot of money. Another benefit of target is they have very easy returns, in my opinion.
The challenge near term is that they have, when you compare them some Walmart, is they have a bigger percentage of the business comes from discretionary categories so that as the economy slowed, they were hurt more margin wise.
They had more discretionary things in stock, I think those things sold down and they had to work more aggressively to clear, whether it's patio furniture or small appliances were clothing to some extent, the same issues with electronics.
And that's the primary differentiation between Target and Walmart.
Walmart is a consumer Staples company because of the extra weight and groceries. Target is a consumer discretionary company, and I think operationally, they done a lot of good things. The catalyst for target probably going into the end of the year will be to show that they have inventories aligned and maybe they've been successful with good merchandising and drawing demand back to some of those higher-margin categories.
So some markdown will be a big focus as we progress through the long holiday season with Target.
>> Great insights there for Target. We've got a question coming in from the past couple minutes about another big retailer. This one, can we get your view on Costco? What's Costco? Is Costco just everything?
>> Costco is a stock that I think is often misperceived in the market. it always trades at a very high multiple. I think for the bears were a lot of peoplewho are looking at Costco, they say, look at the high multiple of trades, they are a lot higher than almost any of the retailers.but when you dig into it, it comes down to a lot of catalyst that I talk to you at the top of the show. Number one is to have very strong traffic over the course of many years, and they have also been very relevant.
so probably in any given year, about two thirds of Costco's operating income comes from the membership fee.
And that adds a level of, you know, ideally as a level of stability to operating income that you typically don't see in retailers. Obviously, it's not recurring revenue like you would see maybe with a drug company or a software company, but so target benefits from the membership revenue. Their renewal rates have been in the neighbourhood of the low 90s and often record levels, which shows that they are relevant, and then they lower prices in order to make that membership sign up more and more compelling.
So that's been a major factor with them. Another thing that I think differentiates Cosco is they are one of the very few US retailers that's been successful going international.
Most of them, Walmart has had some success, but many of the others have not been translatable.
Cosco's international stores, they are still growing in square footage, the stores are very productive by company reports.
They also have a very big private label which they used to compete with brands or discounts. And the other saying it that the people who visit Cosco knows that since the 1980s, they haven't raised the price of their hot dog and soda combo, which people like. And around the holidays, people see good television ads for Costco at a time when I guess when we are sceptical about everything.
Costco offers great deals on gas. They often have good prices on things likecashmere sweaters, things that are good gift items. They have remained relevant by offering really low prices and it's kind of a circle that allows them to keep that going.
>> What's the big challenge for a name like this?
Obviously you said it has shown its staying power over the years. What could trip them up?
>> I mean, I think one of the challenges is probably of the renewal rates don't continue. Inflation is always a challenge and passing it through. And the other thing I think is always a challenge for retailers and especially for one of the low cost businesses is you have to grow your sales faster than your SG and A.
Selling, general and administrative expenses.
Healthcare costs are always a major issue.
that's probably one of the challenges for just about all of the retailers to overcome.
so with Costco's operating margins in the 2 to 3% region, they have to be efficient. The execution has to be almost perfect.
It generally is, but they have to do everything right.
There's not a lot of room for missteps.
>> Alright. Interesting stuff. Got another question here, this one about the grocery space.
Could we get your guests opinion on Kroger?
>> Yeah.
Kroger's, I think to a very large degree, in my eyes, a big data story.
So behind Walmart, they are a huge seller of groceries, but I think one of the things that's differentiating them over the years is very use of big data. At one of the things they've done really, really well is offer customized promotions.
And the reason that's important is that if they know all of our shopping behaviour, they can offer coupons that are relevant to me and you, and what that avoids is having to go out the newspaper circular to drive sales which creates a competitive environment pricewise, which suppresses margins.
Another thing that big data helps them to do is to merchandise the stores. You can turn over your inventory, you can get rid of SKUs that aren't as productive, askew being stock keeping units of items.
One of the things Costco said they have learned is often when you are trying to streamline things, your least turning SKUs, you eliminate those.
What they found a some of the categories, some of their lower selling items, they might be gluten-free or dairy free or related to a certain food allergy. And by having those products, they are able to keep a customer who has a big basket.
So in a business with very, very narrow margins, grocery stores are in the 2% range, being able to use data efficiently is extremely important. In almost all of their markets, Kroger competes with Walmart.
And I think the way they compete with Walmart is not necessarily on price, so I think they try to have good prices as well as quick checkout lines.
And in many cases, they are a little bit closer to the customer. They also have a focus on they call it share of stomach.
So they focus a lot more on prepared foods and fresh foods in order to try to maybe take a little bit of market share away from restaurants. So interestingly, a business that we all know very well, one of the positives for it is big data which a lot of people are seeing. Inflation is obviously the challenge.
Being able to push prices higher or charge more when people literally may not have it, so that's a challenge in the other challenge will be when we get deflation.
That's a whole other set of challenges to deal with if prices on some of the commodity issues like milk and meat that are flexible start going down.
>> Interesting stuff. I always overlook that important data component when it comes to somebody's retailers to get our attention. We are going to affect your questions for Chris Graja on retail stocks in just a moment's time.
As always, make sure you do your own research before you make any investment decisions.
Canadian household net Worth fell again in the third quarter, marking the second straight decline.
The latest drop comes at a time when Canadians are already feeling the squeeze of higher inflation and rising interest rates. Anthony Okolie joins us now with more.
>> Canada has seen back-to-back declines in household wealth.
Canadian household wealth fell 2.1% in the third quarter as debt servicing costs continue to climb higher for many Canadians.
And it's not just household wealth that took a bit of a hit. Canada's net foreign asset position also saw some weakness.
And this is the difference between Canada's and international finance soul assets and its liabilities.
As this chart shows, it fell to the end of the quarter to its lowest level since the first quarter of 2020.
This marks the third quarterly decline as global equity markets continue a downtrend and Canada's national wealth also fell in the third quarter. It was hurt by the drop in housing along with the drop in the value of our natural resources, which was dragged lower by weakness in global commodity prices, especially energy and metals in the third quarter.
Now, returning to Canadian household net worth again, more weakness in Canadian financial markets and the ongoing downturn in housing was a big drag on household wealth in the third quarter.
On the plus side though, Canadian household savings rates in nominal terms was actually higher in the third quarter, and that's because household compensation, that's wages, outpaced a more restrained rise in household consumption.
As you mentioned, the headwinds of higher interest rates, inflation, we see that consumption in the third quarter. While the asset values fell, the liability side of our balance sheet in Canada continued to grow.
But at its slowest pace since the second quarter of 2020. And rising debt was driven by credit market debt, well mortgage debt slowed in the third quarter as rising rates kept many homebuyers on the sidelines.
Now, despite decelerating, debt growth still outpaced income gains, leading to an uptick in debt to disposable income ratio to 183% in the third quarter.
I think what today's data reveals is that financial headwinds have been hitting households finances that continue to intensify into the third quarter. Greg?
>> Of course, this is been a year when we can finally close the books on a couple of weeks a big change when it comes to borrowing costs. Inflation, it proved it wasn't transitory. There were these jumbo sized rate hikes. We dealt with a lot of drama. Heading into next year, if the markets right, some of the pundits are right, they finally get to the place where they are not going to raise anymore but sorta stay there. What does TD Economics think that means for household debt, for the balance sheet?
>> Looking ahead, TD Economics expects pressures like inflation and home prices to ease going forward but is going to take some time for Canadians to get a break from these higher debt servicing costs.
The expected interest rates will remain elevated throughout next year, which means that the debt service ratio will continue to rise, likely exceeding its pre-pandemic peak by the second half of next year. What that means is it's going to put more pressure on household wealth into 2023.
> Interesting stuff. Thanks.
> My pleasure.
>> MoneyTalk Anthony Okolie.
A quick check in on the market there.
We will check in with the TSX Composite Index.
we lost our hold on it. We will pretty much call this flat.
we are down a point on the TSX. Some of the energy names, there was the rising price of crude. Suncor is hanging in at $40.91, it's up 1.
2%. Some weakness in tech plays today. With Shopify, it slipped into the positive side of the ledger but it's just pretty mild, just 1/3 of a percent.
South of the border, the S&P 500, course, tomorrow morning we get the latest quote on US inflation just as the fatheads and to its two-day meeting to decide what to do but interest rates when it comes out on the other side on Wednesday. Going to be a big week.
We've got some momentum, we are up a little more than half a percent. The tech heavy NASDAQ trailing in the larger market putting some green on the screen, and visa, some of the credit card companies, MasterCard and Visa, making games today, not surprising given the time of the year.
We have these up a little bit more than 2%.
We are back now with Chris Graja from Argus Research.
We are talking retail stocks. Here's an interesting one.
What's your Outlook for William Sonoma?
Will they be a holiday winner?
>> One of the things that William Sonoma has really done well over the years is innovation and that's probably, when you think of the bull case for the stock, that the company has done such a good job, beginning with the William Sonoma brand, which is going back… A lot of stuff was unavailable in the United States, the founder went to Europe, went to France and found a lot of really unique products.
And they've turned that cash flow, they've got Pottery Barn and they grew that into their biggest brand from scratch.
They incubated Pottery Barn kids, Pottery Barn teen, West Elm which is a bit more modern to appeal to the millennial's and Gen Z, all from scratch.
and one of the things that kind of bothers analysts and everybody is whencompanies make unproductive acquisitions. So William Sonoma has shown the ability to grow from scratch and incubate things from the ground up. One of the things I think can be beneficial for them going into the holiday and potentially his next year as they have their own internal design team, so they are not selling products, merchandise that are just kind of randomly sourced from manufacturers, so they have a bit more ability to either design towards lower price points or where people are moving to smaller homes and apartments, they've actually had a successful line there and they also have the ability to put a little bit more value into it and one of the things is it's benefited them in the retail market, they have a mix of stores in real life and online. The original business had a big catalogue component. They were able to turn those names into mailing lists and more than half of the business is online, which is a benefit now.
So people have been spending a lot on their homes.
The company did see an inflection point in new demand in the fall.
But I think they have a lot of differentiated products going into the holidays. So again, the bull is all of the unique things that they do and the bear is, it's a discretionary category, some of that spending is slowing down a little bit through the holidays.
> Chris, great to have you on the program today. Great bigger insights.
I look forward to our next chat.
>> Things a lot.
>> Our thanks to Chris Graja, he is senior retail analyst at Argus Research.
We will be back tomorrow to bring you reaction and analysis on the latest US inflation report. You don't want to miss that.
On Wednesday, Christian Medeiros, partly a manager at TD Asset Management will be our guest taking your questions about asset allocation. A reminder that you can get a head start on your questions for us.
Email moneytalklive@td.com. That's all the time we have for the show today.
Thanks for watching.
We will see you tomorrow.
[music]
Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see her.
We are going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show: it will have a look at the outlook for the retail sector as we get into the real sake of the holiday shopping season with Chris Graja from Argus Research will join us.
And in today's WebBroker education segment, Caitlin Cormier is going to show us how you can screen for different types of ETFs using the platform. So here's how you can get in touch with us.
Just email moneytalklive@td.com or you can fill of that your response box right under the video player here on WebBroker.
And before get to our guest today, let's get you an update on the markets.
We do have some green on the screen. It's a little more modest on the side of the border. We are just hanging in with the TSX composite index of a little shy of10 points, although we are noticing a move higher in the price of crude today, that Keystone Excel link that we heard about last week. The pipeline is still closed with no timeline for reopening.
It seems to be pressuring her price is a little bit higher. The American benchmark, WTI, is up to the tune of 3 1/3% right now. So there is some money moving in some energy plays, including Cenovus. Let's check in on them.
They are of 2442. Their weakness in some of the mining names, including First Quantum minerals, at this hour down about 4 1/2%, 31 bucks and $0.20.
South of the border, their green on skin is a little bit firmer. It's going to be a pretty big week.
We're heading into the holidays, maybe you are winding down.
US inflation reports coming up tomorrow morning.
At the same time, at the US Federal Reserve, on the heels of that report me up for morning, heading into today meetings to make the next rate decision, this is going to be a pretty big week for investors. We will have it all covered for you at MoneyTalk and, of course, you don't want to lose focus alone. The S&P 500 up about half a percent, Little 520 points.
The tech heavy NASDAQ holding up against the broader market, up about… There was a bit on Wall Street, we want to check in on Exxon.
Hanging a little more firmly, 105 bucks and change. We will call that up 1.8%. That's your market update.
December is one of the most important times of the year for the retail space, but with inflation and rising prices on the minds of many consumers, will this holiday season see disappointing sales? Joining us now for his view is Chris Graja, Senior regional analyst at Argus Research. Chris, welcome to the program.
Great to talk to you about this topic at this time of the year.
What are the catalysts right now that might separate some success stories for some perhaps not so successful stories this holiday season?
>> Yeah, that's a great question.
To put catalysts in context, the reason they are so important is everybody on Wall Street, we'll build our models and price in earnings, we price in long-term growth rate, we kind of assess the risks, the management.
And then you need a change in order to push the shares to be worse above or below what's in your model.
And I would put the catalysts right now probably three categories.
To remember them easily, innovation, relevance and strength.
And the reason innovation is so important is, you spoke about in the introduction, companies need pricing power to overcome all of the inflation that's out there.
And what we see right now is the companies that have innovative products or have invested in doing unique things have the greatest pricing power and the greatest ability to preserve margins.
So as earnings reports come out in the fourth quarter, the question is going to be, who was able to continue to drive sales? The questions will be about elasticity.
So when you raised prices, how much did your sales trail off? And then how much margin to companies to sacrifice?
and above expected results on any of those things could be positivefor the stock. In terms of relevance, relevance translates into store traffic.
And mathematically, in the retail world, same-store sales which are a main driver of how people look at the retail stocks, is a combination of traffic and ticket.
And over the long term, ticket is kind of a combination of a bunch of things, but some of it is pricing and it's going to be hard to do on a long term.
So companies need to draw people into their stores, whether it's with a treasure hunt atmosphere, whether it's education, whether it's new product drops, as companies like to say, whether it's convenience.
So all of those things, particularly in this environment, where people are going to be increasingly challenged in how much they can pay is how do you draw people into the stores? If you get them in the store and you get them excited, given that people only have so many dollars to spend, how do you get more and more of those scarce dollars?
Maybe it more than they intended to spend, with excellent merchandising. And the third want to talk about right now is financial strength, and this can be both a positive catalyst and an anti-catalyst. In a tough market environment, showing that you have the ability to raise dividends or to be a little bit stronger in terms of repurchasing stock, those things are all very important and positive. With interest rates higher, and all of us looking at companies balance sheets, a company that has debt to rollover and the possibility of doing it at several basis points higher than they did previously, the possibility that somebody, when rates were low, may have been a little bit more aggressive and took on floating-rate debt. Now that floating-rate debt is going to be a lot more expensive.
And the ability to make acquisition, companies have been down, there have been challenges to some of their business models, so the companies that have a warchest, if you will, the ability to make a smart acquisition, there could also be a catalyst going forward and then maybe one tactical loan.
As we look to the end of the year, one of the questions is going to be, whose inventories are clean? The big change story this year was that we went from at the beginning of the year, everybody was scrambling, scribbling with supply chain issues, trying to get their inventory stocked up. Then, consumer demand kind of turned on a dime and it became, how do we clear through all of these inventories? So I think investors want to see companies go into Q3 with clean inventories, so that means a couple of things. One is there is a looming markdown risk on the balance sheet.
And number two is that companies, if they have the old merchandise out, they will have the ability to flow in new merchandise.
And that's become particularly important for the day after Christmas.
Shoppers gift cards are an increasingly popular gift item. Some people go into the stores with their gift card, the best retailers want to have fresh, new merchandise out so that people are buying new things, ideally at full price, rather than just combing through the discount racks.
So those are some of the near-term catalysts and ways to think about them right now going into next year.
>> So with those is our signpost, you have a company that perhaps innovating, you have one that still relevant to customers, you said, we are watching our dollars pretty carefully, making sure we want to spend them here, they got that financial strength. What is the overall atmosphere for holiday shopping look like?
It sounds like there are some names that are better position than others, but in the end, the shopper has to show up.
How are we feeling about the season so far?
>> Right now, my forecast for holiday shopping is for a 5% increase over last year.
The National retail Federation, which is a big US trade group, is in the 6 to 8% range.
So I will give you the pros and cons. So when the pros, employment is still relatively strong.
Household balance sheets have come out of the pandemic at an aggregate level in a pretty strong position, and one of the things we've seen covering the sector for a long time is that people generally want to make the holiday special for the people they care about, and that's probably even more truecoming out of the pandemic. People want to get back to normal and feel that things are normal and kind of happy holidays like the ones we used to know.
On the con side, the challenges our first that inflation is causing people to spend more and more of their money on food and staples and basics. So that left less money available for discretionary purchases.
And those things have more margins for the retailers.
So you kind of have to go through the forecast line by line and category by category. So for me, I got grocery stores up seven for the holidays. And it's normally a very slow-growing category, it two or 3%, but because of all the inflation and the necessity of buying groceries and probably the additional advantage of dining at home being cheaper than eating out at restaurants, I think you're going to see stronger growth than we would normally see at grocery stores.
I have about 4% in general merchandise, some of that is inflation.
Some of that is staples.
But I mean that's a bit of a question but I think 4% is a reasonable number. I think e-commerce is probably the most difficult to forecast. My forecast there is for a 5% increase. It's been growing faster than that, but we are mapping really strong numbers in the past few years. And the other thing I think we are likely to see is that people are going back to stores. You know, after many years of people sitting on the couch andbuying online, you know we seem to see the Black Friday weekend, the return to stores in the fact that people just want to get back to the experience of being in stores and buying things that way.
So I'm at 5% and we will take a look at that as the season followed.
>> Interesting stuff in a great start to today show. We are going to get your questions about retail stocks for Chris Graja just a moment time. A reminder, course, you in touch with us anytime. Just email moneytalklive@td.com or you can so that your response box under the video player here on WebBroker. Now, let's get you updated on some of the top stories in the world of business and take a look at how the markets are trading.
Microsoft is entering into a 10 year cloud computing deal with London Stock Exchange Group. The agreement will see the software giant take a nearly 4% stake in the exchange operator.
And over the course of that decade, LSEG group is committing to spending at least $2.8 billion in Microsoft cloud products. Mike is off says advances in cloud and artificial intelligence will transform how financial institutions carry out their work.
Shares of Horizon Therapeutics or the spotlight today.
The drugmaker is being acquired by Amgen in a deal valued at almost $28 billion.
The deal will see Amgen add several already approved drugs with offerings, strengthening its rare diseases portfolio.
We have some dealmaking today in the outdoor grilling space. It Weber is being taken private by BDT capital part in a deal valued at $3.7 billion. The maker of grills and growing products is the deal has been approved by the board and it expects the transaction to close in the first half of the new year.
We are up about 10%.
The S&P 500 is also in positive territory. A pretty big week, we are going to get the latest read on US inflation tomorrow.
And then the Fed tomorrow as well heads into its two-day meeting to decide what to do with interest rates going forward.
The market consensus seems to be 50 basis points but all will be known on Wednesday.
We are back now with Chris Graja. We are taking your questions about retail stocks so let's get to them. Our first one here, Someone wants to get your view on Home Depot.
>> Sure.
And maybe I'll lump Home Depot and Lowe's together in here.
So a home improvement retailers, the big question right now is how much are they going to be affected by the slowdown in the housing market? So the bull case first.
The bull case is that a lot of the purchases that people make at home improvement stores are out of necessity rather than discretion. So if your refrigerator breaks, if you have to clean up your backyard or do some painting, a lot of those things are both small ticket and relatively necessary at the time.
The other thing that's kind of working on things is that a lot of homeowners… The increase in mortgage rates is putting a lot of people out of the market, so one of the things I'm looking at is that if people are going to stay put and if they've locked in a mortgage rate at say 3% or very low level, if they are employed, they are going to have the ability to fix up their existing home.
The other thing that's a potential catalyst on the positive side for Home Depot and Lowe's is that when you… So a lot of companies, a lot of retailers, sorry, a lot of individuals are going to continue to fix homes that are aging, that are 50 years old.
The average housing stock in the United States is about 50 years old. They are going to continue to make improvements there.
On the calm side, the worry is that with the slowing economy, with more inflation and the fact that people have been spending more and more on their homes, during the pandemic while they were home, they will have less money to spend in that sector. And I guess where I differentiate Home Depot and Lowe's, Lowe's is going through a bit more of a turnaround.
Their new CEO, new-ish CEO, is focusing on margins. For a long time, Lowe's was really good at driving the topline, but not necessarily getting the bottom line.
They showed a much stronger commitment to that. Home Depot has a bigger percentage of the business and serving professionals. So they are about half pro-and half do it yourself.
And that pro-business is probably seeing the stronger demand.
Lowe's said last week that when they speak to their professional customers, that part of the market is still seeing pretty strong order marks for demand going into next year.
So when the bull case, maybe the sector is not as discretionary or as volatile as people think.
When the bear case, I think people are a little bit concerned number one with a slowing housing market, the less housing turnover and the fact that people may not have as much discretionary income to do major remodelling projects.
>> Those two scenarios lose lead out there are sound like the discussions I have around the dinner table.
My wife says, we need to do this and this, usually about the master bathroom, and I'll say, there could be tough times ahead.
let's take another question from the audience. This one is on the outlook for retail behemoth Walmart. Would you think about this one?
>> Walmart is a stock on positive on.
at this time of year, they arein the value business.
They have low prices.
A lot of people are turning to them because they have to make ends meet.
One of the things that's been challenging for Walmart is that their customers are spending more money on groceries. So the good thing is that Walmart has that grocery department.
The bad thing is that they get a lot of their margin from discretionary products.
So that part of the business has been a little weaker, but they are very efficient. They are improving their online capabilities and one of the things they did that I think is very helpful as they kind of looked aware they want their international business to be over the next 15 or 20 years, so the focus is on Canada as one of the important countries, India, China and Mexico, and I think that will eventually be very beneficial for Walmart in the future.
Again, probably the challenge, if you're looking for risks, is while they serve a pretty broad demographic, they do have a bunch of customers who are more value focused and are probably feeling the pinch more and more of what's going on. The last time I visited the store over Black Friday weekend, one of the things we saw was that the front alley of Walmart was a very basics, it wasn't discretionary, televisions and things, it was things like rice and beans and cans, flour, cooking oil.
So very basics to help people meet their needs. So that should drive traffic but may be less of it will be in the discretionary categories.
> Chris, he pointed to the fact that the discretionary is where some of the margin comes from. I think in years past, before the upheaval of the pandemic, the inflation are trying to battle right now, part of Walmart story was that because they are so big and they have so much influence when it came to the supply chain was that they could pressure down some prices. Do they have that power in an inflationary environment like this or they feeling like everybody else?
>> I think part of it everybody feels.
on the other hand, I think Walmart is trying to be more efficient.
One of the things they did last year is they were able to use their clout to charter ships, to make trucking more efficient.
But by buying so many things, retailers being a major customer, they are in a position… Maybe it's on a logistics to make it win-win. Maybe you deliver products to one spot for Walmart or a number of distribution centres rather than individual stores.
So I think based on their size, they have the ability to negotiate and try to find some ways to take friction out of the system and, ultimately, continue to build relationships so they are getting retailers the best products but they are feeling a little bit of pressure.
One thing we see in the retail market is that companies are using their own private label products.
Walmart has them, Costco has them, Kroger has them.
And they can use their private label products to fill wide space, where other products might not be on the lower price and, or to use their own products as a bit of a lever to get some of the big consumer products companies to negotiate with them a bit.
>> Interesting set. As always, at home, make sure you do your own research before you make any investment decisions.
We will get back to your questions on for Chris Graja on retail stocks in a moment's time. It just reminder that you can get in touch with us at any time. Email us at moneytalklive@td.com. Now let's get our educational segment.
If you are looking to screen for different types of exchange traded funds, WebBroker has tools which can help.
Caitlin Cormier, client education instructor at TD Direct Investing has more.
>> Today, we are going to explore the world of ETFs. We are going to take all of the ETF that are out there on the market and find a way to narrow down those ETFs to those that are meeting the specific criteria that we are interested in researching, and then how we can compare those funds to one another.
so let's start by hopping into WebBroker. What we are going to do is you're going to click on the research button and we are going to go under tools and click on screeners.
now, usually when you land on this page, we are looking at stocks, but today we are going to go all the way over to the ETFs tab and we are going to create a specific screen for ETFs. So we are going to click on the create custom screen button and here's where we can input the different criteria that's important to us when looking for ETFs.
Now, there's tons of different options for you to explore in the screen, but for today, I've chosen a couple. So I'm going to choose fund category and we are also going to choose index specifically.
So as I scroll down here, I'm going to choose show only index funds and for fund category, let's go ahead and use Canadian equity.
So I'm just going to scroll, here we go, Canadian equity. So what we can see is that there is 110 Canadian equity ETFs and out of those that are ETF funds are 48… Sorry, index funds, there are 48. We are going to dis-include mutual funds for today so we see 46 of them are ETF's. We are going to click to view 46 matches. So this is going to show us the results of that to criteria that we put in so we can see all of these are Canadian equity ETFs that are index funds as well.
To narrow this down a bit and get some funds to compare, I'm going to go under the profile and I'm going to choose equity style. So I want to make sure the ETFs when comparing are similar.
I went to click here and I'm going to look at five different large-cap blend ETFs.
Before I move from the screen, I'm going to mention that there is a lot that you can look at to simply from the screen. As you will see, just by clicking around.
But today, we are going to look at the comparison tool.
So I'm just going to choose five different ETFs here just kind of randomly and click the compare button.
So the compare screen is a really great opportunity to be able to see these five different ETFs side-by-side and really get some specific information on each one.
So as we scroll down, we can see some summary information. So we've got net asset value, we've got volume, so how actively these are traded, the assets under management, MorningStar ratings, MER or management expense ratio, maybe you are looking for an ETF that's going to pay a distribution so you can see that right here.
We can close out and move on to profile, see how long the fund has been around for, how long the manager has been with the fund.
If we click on performance, we can see annualized returns as well as calendar returns and compare these funds at side-by-side.
And we also have risk information here. So we can see all these different risk as measurements, compare them side-by-side with these five ETFs that we have.
So additionally, we also have holdings allocations which of course we can assume most are gonna be Canadian equity given that we are looking at Canadian equity funds and majority invested in Canada. If we decide during this process that one of these ETFs isn't quite cutting it, we can go ahead and actually drop it off our criteria, client of clean up the screen a little bit to make it a little bit easier to see those still in contention for future research.
So that is one of the great tools that we have in WebBroker to help you not only research to kind of find it different ETFs that might be to your liking but then also take them that step further and use the comparison tool to really kind of leave through and find out which one might be best for you.
For additional information on WebBroker and all of the different resources we have, please check out the learning centre in WebBroker.
>> Our thanks to Caitlin Cormier, client education instructor at TD Direct Investing.
Now before we get back to your questions about retail stocks for Chris Graja, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us. Even sent a email anytime@moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.
Just write in your question and hit send. We will see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back now with Chris Graja, we are taking your questions about retail stocks.
Can we get your take on Target, Chris?
>> Sure.
one of the things that's been a real positive for target throughout the pandemic is that they havemade good investments that have allowed them to be more and more efficient and serve customers better.
Their typical customer is busy. She's, you know, on a bit of a budget but also on some style and a lot of the growth in their sales has been through sort of one day or kind of quick access things. You place an order online, you pick it up and store or you curbside pickup. That was very important during the pandemic.
It was very, very popular. One of the reasons these things are important is because of margins. So one of the big things in retail right now is the cost of shipping is a drag on company's gross margins.
They are paying out more and more.
So by the companies like Target being able to fill Internet orders either in the store or in the parking lot, days save a lot of money. Another benefit of target is they have very easy returns, in my opinion.
The challenge near term is that they have, when you compare them some Walmart, is they have a bigger percentage of the business comes from discretionary categories so that as the economy slowed, they were hurt more margin wise.
They had more discretionary things in stock, I think those things sold down and they had to work more aggressively to clear, whether it's patio furniture or small appliances were clothing to some extent, the same issues with electronics.
And that's the primary differentiation between Target and Walmart.
Walmart is a consumer Staples company because of the extra weight and groceries. Target is a consumer discretionary company, and I think operationally, they done a lot of good things. The catalyst for target probably going into the end of the year will be to show that they have inventories aligned and maybe they've been successful with good merchandising and drawing demand back to some of those higher-margin categories.
So some markdown will be a big focus as we progress through the long holiday season with Target.
>> Great insights there for Target. We've got a question coming in from the past couple minutes about another big retailer. This one, can we get your view on Costco? What's Costco? Is Costco just everything?
>> Costco is a stock that I think is often misperceived in the market. it always trades at a very high multiple. I think for the bears were a lot of peoplewho are looking at Costco, they say, look at the high multiple of trades, they are a lot higher than almost any of the retailers.but when you dig into it, it comes down to a lot of catalyst that I talk to you at the top of the show. Number one is to have very strong traffic over the course of many years, and they have also been very relevant.
so probably in any given year, about two thirds of Costco's operating income comes from the membership fee.
And that adds a level of, you know, ideally as a level of stability to operating income that you typically don't see in retailers. Obviously, it's not recurring revenue like you would see maybe with a drug company or a software company, but so target benefits from the membership revenue. Their renewal rates have been in the neighbourhood of the low 90s and often record levels, which shows that they are relevant, and then they lower prices in order to make that membership sign up more and more compelling.
So that's been a major factor with them. Another thing that I think differentiates Cosco is they are one of the very few US retailers that's been successful going international.
Most of them, Walmart has had some success, but many of the others have not been translatable.
Cosco's international stores, they are still growing in square footage, the stores are very productive by company reports.
They also have a very big private label which they used to compete with brands or discounts. And the other saying it that the people who visit Cosco knows that since the 1980s, they haven't raised the price of their hot dog and soda combo, which people like. And around the holidays, people see good television ads for Costco at a time when I guess when we are sceptical about everything.
Costco offers great deals on gas. They often have good prices on things likecashmere sweaters, things that are good gift items. They have remained relevant by offering really low prices and it's kind of a circle that allows them to keep that going.
>> What's the big challenge for a name like this?
Obviously you said it has shown its staying power over the years. What could trip them up?
>> I mean, I think one of the challenges is probably of the renewal rates don't continue. Inflation is always a challenge and passing it through. And the other thing I think is always a challenge for retailers and especially for one of the low cost businesses is you have to grow your sales faster than your SG and A.
Selling, general and administrative expenses.
Healthcare costs are always a major issue.
that's probably one of the challenges for just about all of the retailers to overcome.
so with Costco's operating margins in the 2 to 3% region, they have to be efficient. The execution has to be almost perfect.
It generally is, but they have to do everything right.
There's not a lot of room for missteps.
>> Alright. Interesting stuff. Got another question here, this one about the grocery space.
Could we get your guests opinion on Kroger?
>> Yeah.
Kroger's, I think to a very large degree, in my eyes, a big data story.
So behind Walmart, they are a huge seller of groceries, but I think one of the things that's differentiating them over the years is very use of big data. At one of the things they've done really, really well is offer customized promotions.
And the reason that's important is that if they know all of our shopping behaviour, they can offer coupons that are relevant to me and you, and what that avoids is having to go out the newspaper circular to drive sales which creates a competitive environment pricewise, which suppresses margins.
Another thing that big data helps them to do is to merchandise the stores. You can turn over your inventory, you can get rid of SKUs that aren't as productive, askew being stock keeping units of items.
One of the things Costco said they have learned is often when you are trying to streamline things, your least turning SKUs, you eliminate those.
What they found a some of the categories, some of their lower selling items, they might be gluten-free or dairy free or related to a certain food allergy. And by having those products, they are able to keep a customer who has a big basket.
So in a business with very, very narrow margins, grocery stores are in the 2% range, being able to use data efficiently is extremely important. In almost all of their markets, Kroger competes with Walmart.
And I think the way they compete with Walmart is not necessarily on price, so I think they try to have good prices as well as quick checkout lines.
And in many cases, they are a little bit closer to the customer. They also have a focus on they call it share of stomach.
So they focus a lot more on prepared foods and fresh foods in order to try to maybe take a little bit of market share away from restaurants. So interestingly, a business that we all know very well, one of the positives for it is big data which a lot of people are seeing. Inflation is obviously the challenge.
Being able to push prices higher or charge more when people literally may not have it, so that's a challenge in the other challenge will be when we get deflation.
That's a whole other set of challenges to deal with if prices on some of the commodity issues like milk and meat that are flexible start going down.
>> Interesting stuff. I always overlook that important data component when it comes to somebody's retailers to get our attention. We are going to affect your questions for Chris Graja on retail stocks in just a moment's time.
As always, make sure you do your own research before you make any investment decisions.
Canadian household net Worth fell again in the third quarter, marking the second straight decline.
The latest drop comes at a time when Canadians are already feeling the squeeze of higher inflation and rising interest rates. Anthony Okolie joins us now with more.
>> Canada has seen back-to-back declines in household wealth.
Canadian household wealth fell 2.1% in the third quarter as debt servicing costs continue to climb higher for many Canadians.
And it's not just household wealth that took a bit of a hit. Canada's net foreign asset position also saw some weakness.
And this is the difference between Canada's and international finance soul assets and its liabilities.
As this chart shows, it fell to the end of the quarter to its lowest level since the first quarter of 2020.
This marks the third quarterly decline as global equity markets continue a downtrend and Canada's national wealth also fell in the third quarter. It was hurt by the drop in housing along with the drop in the value of our natural resources, which was dragged lower by weakness in global commodity prices, especially energy and metals in the third quarter.
Now, returning to Canadian household net worth again, more weakness in Canadian financial markets and the ongoing downturn in housing was a big drag on household wealth in the third quarter.
On the plus side though, Canadian household savings rates in nominal terms was actually higher in the third quarter, and that's because household compensation, that's wages, outpaced a more restrained rise in household consumption.
As you mentioned, the headwinds of higher interest rates, inflation, we see that consumption in the third quarter. While the asset values fell, the liability side of our balance sheet in Canada continued to grow.
But at its slowest pace since the second quarter of 2020. And rising debt was driven by credit market debt, well mortgage debt slowed in the third quarter as rising rates kept many homebuyers on the sidelines.
Now, despite decelerating, debt growth still outpaced income gains, leading to an uptick in debt to disposable income ratio to 183% in the third quarter.
I think what today's data reveals is that financial headwinds have been hitting households finances that continue to intensify into the third quarter. Greg?
>> Of course, this is been a year when we can finally close the books on a couple of weeks a big change when it comes to borrowing costs. Inflation, it proved it wasn't transitory. There were these jumbo sized rate hikes. We dealt with a lot of drama. Heading into next year, if the markets right, some of the pundits are right, they finally get to the place where they are not going to raise anymore but sorta stay there. What does TD Economics think that means for household debt, for the balance sheet?
>> Looking ahead, TD Economics expects pressures like inflation and home prices to ease going forward but is going to take some time for Canadians to get a break from these higher debt servicing costs.
The expected interest rates will remain elevated throughout next year, which means that the debt service ratio will continue to rise, likely exceeding its pre-pandemic peak by the second half of next year. What that means is it's going to put more pressure on household wealth into 2023.
> Interesting stuff. Thanks.
> My pleasure.
>> MoneyTalk Anthony Okolie.
A quick check in on the market there.
We will check in with the TSX Composite Index.
we lost our hold on it. We will pretty much call this flat.
we are down a point on the TSX. Some of the energy names, there was the rising price of crude. Suncor is hanging in at $40.91, it's up 1.
2%. Some weakness in tech plays today. With Shopify, it slipped into the positive side of the ledger but it's just pretty mild, just 1/3 of a percent.
South of the border, the S&P 500, course, tomorrow morning we get the latest quote on US inflation just as the fatheads and to its two-day meeting to decide what to do but interest rates when it comes out on the other side on Wednesday. Going to be a big week.
We've got some momentum, we are up a little more than half a percent. The tech heavy NASDAQ trailing in the larger market putting some green on the screen, and visa, some of the credit card companies, MasterCard and Visa, making games today, not surprising given the time of the year.
We have these up a little bit more than 2%.
We are back now with Chris Graja from Argus Research.
We are talking retail stocks. Here's an interesting one.
What's your Outlook for William Sonoma?
Will they be a holiday winner?
>> One of the things that William Sonoma has really done well over the years is innovation and that's probably, when you think of the bull case for the stock, that the company has done such a good job, beginning with the William Sonoma brand, which is going back… A lot of stuff was unavailable in the United States, the founder went to Europe, went to France and found a lot of really unique products.
And they've turned that cash flow, they've got Pottery Barn and they grew that into their biggest brand from scratch.
They incubated Pottery Barn kids, Pottery Barn teen, West Elm which is a bit more modern to appeal to the millennial's and Gen Z, all from scratch.
and one of the things that kind of bothers analysts and everybody is whencompanies make unproductive acquisitions. So William Sonoma has shown the ability to grow from scratch and incubate things from the ground up. One of the things I think can be beneficial for them going into the holiday and potentially his next year as they have their own internal design team, so they are not selling products, merchandise that are just kind of randomly sourced from manufacturers, so they have a bit more ability to either design towards lower price points or where people are moving to smaller homes and apartments, they've actually had a successful line there and they also have the ability to put a little bit more value into it and one of the things is it's benefited them in the retail market, they have a mix of stores in real life and online. The original business had a big catalogue component. They were able to turn those names into mailing lists and more than half of the business is online, which is a benefit now.
So people have been spending a lot on their homes.
The company did see an inflection point in new demand in the fall.
But I think they have a lot of differentiated products going into the holidays. So again, the bull is all of the unique things that they do and the bear is, it's a discretionary category, some of that spending is slowing down a little bit through the holidays.
> Chris, great to have you on the program today. Great bigger insights.
I look forward to our next chat.
>> Things a lot.
>> Our thanks to Chris Graja, he is senior retail analyst at Argus Research.
We will be back tomorrow to bring you reaction and analysis on the latest US inflation report. You don't want to miss that.
On Wednesday, Christian Medeiros, partly a manager at TD Asset Management will be our guest taking your questions about asset allocation. A reminder that you can get a head start on your questions for us.
Email moneytalklive@td.com. That's all the time we have for the show today.
Thanks for watching.
We will see you tomorrow.
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