With student debt repayments set to resume, consumer spending on retail brands and apparel is expected to slow down as Americans tighten their wallets. UBS US Softlines & Luxury Analyst Jay Sole joins Yahoo Finance Live to explain his forecast on luxury brands and department stores, while also taking a look at shares of the On Running brand.

Video Transcript

AKIKO FUJITA: Well, the student loan repayment pause is slated to end later this year. With the additional expense further pinching consumer wallets, the road ahead for several retailers is starting to look a bit more hazy now. Joining us to discuss is UBS US Softlines and luxury analyst, Jay Saul. Jay, always good to have you on the show. It's interesting because you've kind of laid out a profile for those student loan pairs or consumers. It sounds like they've got a little bit more loyalty to brands. What is the direct impact you're looking at right now once those repayments start?

JAY SOLE: Yeah, well, thanks for having me on the show. You know, the student loan payment is a big issue for retailers because when the pause ends, it could be about a $75 billion annual headwind on consumer spending. And a lot of that spending will probably come from discretionary items like apparel. The reason that we say that is because student loan borrowers tend to be a little bit younger. They have more professional jobs. They've completed a higher level of education. And they like fashion.

And so when they look to pull back on spending to sort of make room in their budget for student loan repayments, it could come from apparel. And what's interesting is that we've already seen that since inflation has become an issue in the United States over the last, say, 12 to 18 months. These consumers have already been pulling back on apparel. We think they'll continue to do so as the headwinds from student loans come into play.

SEANA SMITH: Jay, we just had a couple of names from your coverage list that are most at risk you say because of the pullback, that we could see in consumer-- in discretionary spending here. Of those names, who do you think is going to be hit the hardest?

JAY SOLE: Well, I would say that it's really about the specialty retailers and the brands. So if we think about these people who have student loans, they're a little bit younger. That's one of the key differences between them and the average US consumer. And they care about fashion. And so people who care about fashion tend to go to specialty stores. They'll shop directly at brands online. And they tend to not shop as much, say, discounters and department stores. So if we think about mall-based retailers or brands with big online presences, those are the type of retailers and brands who could be impacted by the student loan issue.

AKIKO FUJITA: Yeah, what do you think the tradeoffs are likely to be for those who are buying? I mean, yes, as you point out, they're going to have to start paying down their student loans again. So there is additional sort of income there that they're going to be pinched by. Potential beneficiaries on the other side, you said they don't usually go to some of these discount stores. Could we see potentially a shift?

JAY SOLE: Well, you know, what's interesting is that when I talk about maybe relative exposures, that means that the average consumer maybe shops at a specialty store a little bit more. But these consumers are definitely shopping across all channels. They definitely shop at discounters. They definitely shop department stores, maybe just not quite as much as the average consumer.

So what we really see is we're going to see pressure across the board on consensus earnings estimates as people realize what a big headwind this is. So we're concerned about the trajectory of top line stocks as we go into the back half of the year. And the student loan issue is one big reason why.

SEANA SMITH: Jay, one of the names within your coverage, On Holdings, you're not worried about. It doesn't seem like the pullback here in discretionary spending on this stock. Your price target's about 50% above the current trading price. What makes On Holdings, why do they have such an advantage in this current environment?

JAY SOLE: Well, thanks for the question. On is just a great market share story. This is a relatively small brand that has great momentum with consumers. They're really gaining a lot of momentum, not just in the US, but also Asia, in addition to Europe, which is a European brand. And what we see is that consumers continue to adopt this brand at a really high rate. And because it's a relatively small brand, they're not so impacted by macroeconomic forces right now. Their growth is being fueled by market share gain. And we just see that continuing, and that's a big reason that we're bullish on the stock.

SEANA SMITH: Yeah, it's a massive winner so far this year, up 76% year to date. Jay Sole, great to have you. Thanks for joining.