51 - Stephanie Wissink, Jefferies

Intro: Explore the minds and marketing strategies behind today's winning brands and businesses. Tap into the power of the creator economy with Earned by CreatorIQ, here's Conor Begley.

Conor Begley: Hi everyone and welcome to Earned, today, we have Steph Wissink, the managing director and senior research analyst covering the retail and consumer products categories for Jeffries. Thanks for joining the show.

Stephanie Wissink: Thanks Connor, it's great to see you.

Conor Begley: I know. So Steph and I have known each other for a long time. You've been doing this for 20 plus years, even though you still look like you're 27, I don't know how you do that one. But I'm excited, I'm so excited to have you on today.

Stephanie Wissink: Thank you. It's great to be here. Yes, I don't have any good beauty tips. So unfortunately you see what you get, I guess.

Conor Begley: It's just that good Minnesota sunshine, right? That's what-

Stephanie Wissink: Lack of it. The lack of it, I think.

Conor Begley: Okay. Let's start, because I think a lot of people, they're going to listen to this, don't know what you do, right? So maybe give a really quick, give 30 seconds to a minute. What is your job? What do you do as a profession?

Stephanie Wissink: Yeah. So I'm going to first start with Jeffries. We're an investment bank, a global investment bank. And the simplest way to think about what we do is we connect capital to ideas. So we work with companies that need money and we have investors that have money, and our job is to broker those relationships. And we work on Wall Street, so every day we get to watch this crazy market dictate what the value of companies is, higher or lower. And the great joy I have is to be a consumer analyst, so I get to connect a bit of consumer psychology to decisions around company strategy, risks and opportunities, M& A in terms of buying and selling companies, buying and selling brands, so it's a fun role. I get to do what I love, which is track consumer interest, and then I get to translate it into business strategy and opportunity and valuation.

Conor Begley: Awesome. Well, that's why I've brought you on, right? Because right now markets are getting a little crazy, a little squirly. So I was compiling some numbers and they were even surprising to me, even though I knew they were bad. So Amazon, in the last six months, Amazon down 39%, Nike- 38, Macy's- 46, Google- 25, Facebook- 43, Target- 37, Lululemon- 40%, Nordstrom- 35, LVMH- 28, Revolve- 66, Stitch Fix- 71. I think the direct consumer brands that have gone to market have really gotten hammered the worst. So tell me, based on your understanding of historical downturns, so if you were to look at 2000, 2008, were the last two really big ones. Are we in one? Number one, do you think we're in one right now? Is that happening? If so, how long do you think that will last and how do you see that impacting the retail and consumer industries over that time?

Stephanie Wissink: Yeah, it's a really good question. And it is staggering to see those numbers and realize that the public market has essentially said that Nike is worth 38% less. Those are big haircuts to valuation. So I think part of the reason that the cuts are so dramatic is that the market is starting to price in a recession. So the market is starting to see signs that the consumer is receding. I am not an economist, I am not going to declare a recession, but when we look at behavioral change, we're seeing the consumers making some discriminate changes in how they're behaving that would suggest that they're a little bit less financially confident about their ability to digest inflation. So whenever that happens in the public market, it's effectively a shock to the assumptions that we all have. All the things we thought were true, we now have to go back and reconsider and rethink. And what investors tend to do is they tend to manage from risk up. So they go and say," What's the most risky, lowest level that I could think is even possible, and then work my way back up into what's reasonable?" And right now we're in a period of everyone's trying to assess how bad and how long. And I think there was some concepts of maybe how bad, but then most recently we got Amazon that reported their earnings, Walmart that reported, Target that reported, Kohl's, and it's been worse than anybody expected, so that's creating an incremental shock. The degree of pressure on these businesses and the comments that the companies are making about the pressure on the consumer are more exaggerated than what was expected. And how long it lasts is also coming into play. Short cycle recessions tend to last six to eight months. If you look at long cycle recessions, it can be two to three years. So right now we're in a phase of not knowing how long and when that happens, everyone, again goes to," How much risk do I have exposed right now? And how do I mitigate risk?" And so there's just a very clear exit of capital from the markets and that's what's creating these substantial compressions in stock performance. It's scary. It's scary every day to see the level of reaction, and it's not any one thing that's creating the concern, but it's a mountain of things that are building up, that are really challenging things we thought were certain that are becoming more uncertain.

Conor Begley: Yeah. I think one of the things that's been surprising to me as a relative outsider, right? Because, I'm not looking at it in the same way that you're looking at it on a day- to- day basis is... The sentiment I was seeing was that in a lot of ways, consumer demand is still there for a lot of things. And so there's high employment, high demand, right? But we're still seeing these shocks. It doesn't make a lot of sense to me. How do you make sense of that?

Stephanie Wissink: Yeah, and it's a great observation, Conor, that the data points aren't consistently negative. So when you look at some economic measures, they would say," Well, the consumer balance sheets are healthy, people have been saving over the last couple of years. The high-end consumer hasn't been spending on services and leisure and travel, and so there's a lot of pent up demand for those kinds of things." And on the low end, we've never seen unemployment levels with this kind of wage rate advancement. And so the low end should feel extremely wealthy on a relative basis and so they've got plenty of cash to spend.

Stephanie Wissink: What, in reality though, is happening, is that even on paper, when it looks like the consumer is healthier, the way the consumer shows up at retail is based on a feeling, how they feel, do they feel more financially confident? And if the low-end consumer has wage growth in the double digits, but now inflation is in the double digits for them, they don't feel wealthier. And so they make decisions based on feelings and the psychology of consumerism, more so than the financial algorithm. And the same is happening at the top end, even though the high-end consumer has ample capacity to spend, they're pivoting, they're moving from a very goods-heavy economy over the last couple of years into services and leisure, and so there's some motion at the upper end. And regardless of how much you make, when it costs you 20-30% more to fill up your car with gas, you're just irritated. So there's a little bit of a psychological bitterness at the upper end and that also affects psychology.

Stephanie Wissink: So we don't disagree with the economist that on paper, the consumer should be fine, but what we see behaviorally is when the consumer shows up at retail, they don't feel fine, and that feeling is what's governing their actions right now. There are some other signals, delinquency rates in the credit profiles are starting to rise up, we're starting to see some changes in consumer's perceptions about persistent inflation. So while it may feel like inflation has peaked, there's still more inflation to come. The fed headlines in terms of how hot the economy is running and how they might have to cool it down. And I think there's a fear out there that if we do get into a true recession, that business investment and employment is going to start to unwind. And so then you're also going to have a secondary factor, which is that the employment market starts to destabilize. So all of these things are, are floating through consumer psychology, they're all floating through investor psychology. Investors just have a way every day to take action against that psychological uncertainty, they go to the market and they sell stocks. Where consumers, you can't go to the market and sell your food or sell your goods back, so you just buy less the next time you go.

Conor Begley: Yeah. And I think we talked about this in Miami, just last week. And one of the comments that stood out to me that you mentioned is like," Fear is a weird thing," right? So we've got a lot of people that are looking at their retirement funds, and watching them drop and drop and drop and saying," Hey, you know what? Even if I have to take a 20% haircut, at least I've got it, and I don't have to worry about it anymore." And I feel like it's obviously a really big deal, right? That's a big part of it, for sure. So I guess one... Oh sorry, go ahead.

Stephanie Wissink: Sure. No, I was going to say you're onto something. I think the idea of fear is often paralyzing, but it's certainly unnerving. And I think that's a little bit of what we're seeing is just an unnerved consumer, not feeling entirely confident, at least not as confident as they were even just 90 days ago. And inflation's a big piece of that. When people are seeing the cost of food and fuel going up double digits, those are every week purchases, and so it's just a constant drum beat, a reminder, and it's psychologically stoking that uncertainty. And so now we did a survey recently of consumers and having done surveys over 20 plus years, it's pretty rare to see a consumer base that you survey agree with something in such magnitude that we saw with respect to how much more inflation is likely to come. More than 75% of consumers in our survey thought that there is still more inflation to come. And so magnitude of sensitivity around pricing to us, and that was regardless of income cohort, a 100K plus all the way down to 45K household income, there was a belief that more inflation is still to come. So they're also making purchase decisions today, knowing that in the future, those products are going to cost more and being conscious of that.

Conor Begley: Yeah. I think there's some adage like," If you think it, there is going to be inflation, there will be inflation," right? Because you say," Hey, okay, when I'm repricing this contract, okay, now we're going to price it based on what we expect inflation to be," right? So before it would increase by 3% a year, now we're going to increase it by 7% a year, right? And so some of it just happens because it's happening, which is probably the worst part, right? So once it's broken through and become like, oh no, this is just how it is, it actually becomes harder to bring it back, right?

Stephanie Wissink: Very true.

Conor Begley: So talk to me a little bit about how you've seen retail businesses respond in the past. And frankly, we just had a bit of a crisis during COVID, right?

Stephanie Wissink: Yeah.

Conor Begley: Possibly an even bigger crisis for the retail industry. How have you seen them respond? So when everything, the markets get volatile, little scary, how do you see the leaders respond? And particularly when it comes to sales and marketing spend as well, just because that's obviously our industry that we're in. Talk about that a little bit.

Stephanie Wissink: Yeah. So I think the best way to think about this is to go chronologically back to pre- pandemic and just remind ourselves that we were in an economic expansion period on the back of the global financial crisis, one of the strongest seven year cycles of economic expansion globally, but certainly in the US as well. And it was really an unprecedented time in terms of consumer access to information, social media, influencers, content creation, storytelling, brands were connecting to their consumers in new ways. Many brands were actually taking out old distribution, inserting new distribution that was directly connected to the consumer, the rise of eCommerce for brands. It really was a very fertile time to build business. And then of course it came into this huge shock. And the pandemic had really three important factors. The first is that it made everybody digitally fluent in a snap, because you had to, there was no other way to process your daily activity, work, groceries, your children's events, school, unless you could figure out a way to get connected. So that was big change number one is if you were a late adopter of technology, you ultimately became a quick adopter during that period. The second is that the domains of consumption shifted because people were concerned about going into stores, they didn't want to catch COVID. We didn't know anything about this virus, remember we were wiping down our groceries for the first few weeks thinking that you could get COVID from your groceries. So there was a fear-

Conor Begley: I remember putting bleach on vegetables.

Stephanie Wissink: Yes.

Conor Begley: That's crazy stuff.

Stephanie Wissink: And toilet paper and paper towels and over- the- counter medicines. And it felt like we were going into what probably many people experience as war times that you bunker, not just hunker, but bunker down. And so you have digitization matched with this obsession of hoarding and controlling when things start feeling like they're out of control, and the domains in which that was happening were shifting to online and some stores were actually closed down completely. And then the third is that this was a true health crisis. So we started to see just very extreme differences between the idea of safety and vulnerability. And it created pretty extreme echo chambers and gaps in consumer ends of social psychology among wearing masks, were you a masker or not a masker? Were you a believer in COVID or not a believer? The political establishment, even religious establishment started getting engaged in this. So if we think about that time, there was a lot of change in how consumers behaved and thought, but then the overall social schema in which we underwrote for decades was starting to become challenged. So then take us into 2021, which was our big year of recovery, right? Vaccines. As soon as those shots started going into those arms, those feet walking right back into retail stores. So for the US economy, the true enjoyment and entertainment of shopping came back into the picture and that surprised everybody last year. And at the same time, some of the social categories started to come back, but not in full, they were still on this sliding scale back to normalcy. But biggest surprise of 2021, eCommerce slows, stores bounce back. And as we've come into this year, now we start to see some of the long duration effects of the crisis, supply chain issues and the globalization effect, right? The fact that we import so much from China and China's in lockdown, and how the entire world economy functions, then you add in the Ukrainian war and it adds some instability in our political climate, in our geopolitical climate, and then drives this spike in fuel, which again is an every week purchase for people. So when you're filling up two cars in those garages with gas, it's psychologically drum beating on the inflationary conditions. So even in just a short duration of time, we've gone from firing on all cylinders, great economic growth, people feeling very confident to shock. What felt like a recovery to realization that this is not over yet, and there are some real structural impacts. And I would just say from this week again, because we're real timing, some of these data points, when you have Amazon and Walmart and Target, three of the biggest retailers in the US, all facing massive inventory overages at the same time, because they underwrote a consumer that no longer exists. That consumer was supposed to be spending like crazy and building out their goods investment and what has happened is the consumer has locked up and that's concerning and when it all happens at once. And so definitely some things to navigate through that weren't on investor radars, and I don't think for a lot of companies were on their radars either so we're in recalibration right now.

Conor Begley: Yeah. The other thing that could be affecting consumer behavior as well, I thought a lot about this, is if you were to look at the proliferation of consumer investing through apps like Robinhood and otherwise, as well as the proliferation of basically speculation, right? People gambling on cryptocurrencies that have taken a huge hit. I remember, you just see it, right? I would have friends that would come to me and be like," Hey, you know about business. Tell me about cryptocurrency." I'm like," Don't invest in it. You don't understand it. It's very speculative, don't do it." But I know they all did, even though I told them not to, right? And yes, some of them made money, but on average, over the last particular last year or so, they've not, right? They got hit really hard in a lot of different ways and so I would have to imagine that. And then again, so you have consumers putting money into cryptocurrencies that have gone down dramatically, and then all of these consumers putting money into the markets, which was probably not disposable income into these highly risky assets that have now tanked in the last six months. And so that makes another reminder of like," Oh, I got to tighten up a little bit. Yeah, I've got some cash, but not of as much as I used to, or I thought I would have." So something else that's happened. Well, I want to ask you a question. How do you think that has affected the market? What have you seen when it comes to this shift in consumers investing both in cryptocurrencies as well as in the markets through apps like Robinhood and other mobile applications?

Stephanie Wissink: Yeah. I think you're on something really interesting, Conor, just as a student of consumerism, the observations and the indicators. What's been really ironic over the course of the last few years is that the markets have become incredibly accessible to the average consumer. And you mentioned Robinhood, there have been platforms that have launched, meme stocks have risen because of this, I mean the rocket emoji is a power statement now in social media. So historically, Wall Street was somewhat guarded by the institution. The institutional players controlled the markets and the capital and the flow of money. And now you have a bit of a David and Goliath, right? You have a inexperienced gamification seeking consumer who's playing the markets against the big institutions. And that's happening both in the crypto landscape, but it's also happening in the everyday stock market landscape. But I also think you have other examples of this, StockX, people are buying and selling sneakers. So the idea of the concept of a market, we all want to believe in the altruistic value of the market, and the seamlessness and the transparency, but the reality is these markets are very technical. And so I do think it's factoring into the notion that it's not a video game, there's real capital at stake. And so the idea of when you put in capital into the market, you're not going to get a little reward at the end when it works, but you're also not going to get anything at the end if it goes away. And so there's this element of you're playing a different game and that game is incredibly serious. And yeah, I think you're on to something in terms of the accessibility of the market has changed the dynamic of the market, but it's also changed, I think, the way the market affects consumer thinking as well.

Conor Begley: Yeah. The number of people Googling the S& P 500 or Googling Amazon stock price is probably grown by an order of magnitude in the last five years, 10 years, right? Just on a percentage basis.

Stephanie Wissink: Your stock tracker is essentially OEM on your cell phone now. So when you buy your new iPhone 13, it's an app that's already there. So it's made it very easy to track stocks, whether those are stocks you're invested in, or stocks are just curious about, and you just listed off a list of seven, eight companies that most consumers can identify by name. When you say Amazon to most consumers, they know what you're talking about, and Disney, Nike, Adidas, Macy's, these are places, people and brands that people shop so familiarity, for sure.

Conor Begley: Well, and people like to buy the stocks of things they're familiar with, right? Like,"Oh, I love Nike. It can't go down," right? And they're like," Oh shit, Nike's down 40%," right? Literally, it's like Nike getting cut almost in half like," Oh, it's worth half as much today as it was six months ago." Like," What?" That's not real. It's not actually real. There's no way it's worth half as much. Maybe it was worth 20% too much before and 20% too little now, but okay, so let's talk. Okay, so enough with the doom and gloom, market screwed, we know that. Let that figure itself out. I want to talk about a longer time horizon. So obviously part of the reason that we started working together early on was you started to see like," Oh, hey, this social media thing, some of these brands are really winning, using it in a meaningful way," and particularly influencers within that landscape. So talk to me a little bit about that evolution. How have you seen from, call it, 10 years ago when social media is really just getting started to today, the role that social media has played for these larger organizations, how that's shifted? And then also if you've seen particular companies do it really well, who are some of those companies that you've noticed?

Stephanie Wissink: Yeah. So the proliferation of social media to me has been one of the phenomenons that I think I'm going to be thinking about over my lifetime, because it provides not only an avenue for connectivity and community building, but it also can create some really unfortunate circumstances in these environments. So I think taking the good, the role of the influencer, the role of the brand voice, the storyteller, I don't think has ever been more prolific. And I do think consumers are telling us that they trust influencers in some cases more than they trust their own friends so that's pretty wild. I think with more disclosure and transparency around ads, you're starting to see some shifting in that. And I think new platforms are also rising up, we hear a lot about things like TikTok is that it is as pure and authentic as it can be in social media, versus some of the other platforms might be a little bit more ad heavy. So the consumer's starting to figure out what platforms to use for what, and it's almost like a portfolio of platforms now in social media. And I think brands approach it very similarly. One thing I will say though, is that when we go back and look at the evolution of how brands invest behind these platforms, there was a lot of investment behind visualization. So how do you tell something about your brand in an image, which was the baseline for Instagram, and then how do you start converting that into stories and video? How do you leverage YouTube for education and brand establishment? So it's interesting just to see again, how different platform features are being used in different ways. And I do think maybe over the course of the next few years, you're going to see the best features from all the platforms are going to start to become the common features across all the platforms, because every platform is chasing each other now. And YouTube just launched the equivalence of stories as well. So if you think there's homogenization of platform features, and maybe that means there's going to be either consolidation or some of those platforms just don't make it long term, but that's interesting to see that we've gone from very disparate portfolio platform strategy to homogenization of the basic key features based on whatever is working best on each platform. The other thing though, I think that's changing a bit more too, is as we roll into the next generation, social media is very web 2.0, and we start thinking about web 3, we start really thinking about the role of the creator. And I'm actually really excited by web 3, I think it's super interesting to think that brands could partner with their fans to create content about the brand and those fans can actually be rewarded for it. That's unique. So outside of just becoming an influencer and hashtag tagging, ad response, there actually can be a way through technology to connect that ledger between action, affiliate, brand and creator.

Conor Begley: Yeah, it's like, why do people buy stock certificates for the Green Bay Packers, right? It's not because they get any ownership out of it, right? It just feels like you're a part of it. So let's talk a little bit about sectors, right? So obviously we have our own beliefs in terms of particular sectors where we've seen social media have a bigger impact than others. You've got a little bit of a broader view across industries, although you did really focus on beauty for a while. Where have you seen social media and influencers have a bigger impact and where industries are like," Actually it's just not... You would think it would be here, but it's not here. It's just not really here at all." Do you see that across different verticals or sectors in terms of impact?

Stephanie Wissink: Yeah, this is one of those things that's been a peculiar, I think, eye opening experience. I would've expected social media to be dominant across almost every industry, but we are starting to see certain industries that rise up, certainly passion industries, aspirational industries, and also those that tend to have more demonstrable product categories. So where demonstration and education are really important to the purchase journey, those categories tend to leverage social media uniquely well. Categories that are more utilitarian, not quite as much, although I will give credit to some brands that have been able to create virality, but they tend to use humor, memes, they tend to play up off of what else is working versus creating a new pathway to the consumer. We may not necessarily love to watch story based content around brands that are more utilitarian, but I do think there are ways that they're finding kitschiness and novelty in using social. I think the other thing too is in order to activate social, you need to have a place where people can go, they need to be able to click through to something. So I think that's also another inaudible is many of the major retailers have now launched these ad platforms. And it's because many small brands, utilitarian brands don't have an eCommerce activation site. And so you're going to be buying and clicking through to the retailer, who's then going to deliver the goods. And I think this is going to be a really interesting. Ulta has an ad platform now, they call it Ulta Media or Ulta Beauty Media, UB Media. Macy's has one, Walmart has one, Target has one, Kroger has one. So if you're a retailer, a modern retailer now, you're going to be in the ad business, which is a whole new pathway to connect digital and physical activation.

Conor Begley: It's so funny because it stares you right in the face, right? Amazon's advertising revenue's gone through the roof, right? And so of course, you're sitting there as Walmart going," Wait, why aren't we doing this, right? We're not quite Amazon in terms of search volume, but we're close." Fascinating, I hadn't really thought about that. Okay, all right, let's do one... I don't know if this is fun, but it's going to be one fun end- of- show question, quote unquote. So, for those meme stalkers out there and everybody with a Robinhood account, so if you had to pick three retail stocks that you like over the next, call it, year, what is it?

Stephanie Wissink: So let's assume that we are not going into a recession.

Conor Begley: Well, you can pick things that go down by 20% instead of 80%, right? Doesn't mean they're going to go up, they can just go down less than everything else.

Stephanie Wissink: So I think what's really interesting is if you're going to be risk averse, you're going to... You want companies that tend to perform extremely well when the consumer's under pressure, so those are going to be your companies like Walmart. They tend to be big winners in periods of economic compression. If you're a little bit more opportunistic, you're going to look at those stocks that have been beaten down for maybe not such a great reason. Target is one I'm curious about, I'm not entirely convinced just yet, but Target has unbelievable consumer trust. And there's something about that to me, that tells me number one, they're a survivor, number two, they're probably a long term thriver, but number three, the question is what do they do with that trust? Do they just sell you more merchandise or do they do something more with it? I'm curious about where they head next. And you mentioned Amazon. Amazon doesn't make a lot of money from its retail business, it makes a lot of money from all of its other stuff. And so I think the future of retail ironically is just as much other stuff as it is commerce. So I would put Walmart and Target in that bucket. And I'm one that's not ready to completely yet write off the department store channel. I might be dead wrong, but there's something still in those environments that a certain cohort of consumers still seek single destination shopping. I think where the department stores have gone wrong is they've lost their way in terms of curation. They got too Amazon glorified to try to be everything to everybody, instead of knowing what their position is, sticking with their position and knowing also what their consumer permission is. So a little bit of cleanup in the department store landscape is probably not a bad thing, we've seen that happen. I think those that are left, Nordstrom, Macy's or Kohl's.

Conor Begley: I'm not a Macy's believer.

Stephanie Wissink: inaudible. That to me feels like a little bit of a long ball cost. So I would probably put, yeah, Target, Walmart, put those in the fighters. And if you're looking for big recovery opportunity off of discretionary spending, the department stores would be a good place to put capital.

Conor Begley: There you go. Well, Steph, I really appreciate you taking out the time today, especially on such short notice. I know I learned a lot today, I'm sure the people that listen in will learn a lot as well. And yeah, thanks again.

Stephanie Wissink: You bet. Thanks Conor. Take care.

Conor Begley: All right. Bye, Steph.

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