Retailers, big and small, have been hit by the plague of retail theft, with companies losing billions due to inventory shrinkage. In addition, retailers felt the increased pressure as economic headwinds mounted for both retailers and consumers, from higher interest rates and inflation. Oliver Chen, TD Cowen Senior Research Analyst, joins Yahoo Finance for the #6 Story of the Year and to discuss the state of the consumer and how companies like Walmart (WMT) are harnessing the power of AI.

Chen named Walmart his "best idea" for 2024, giving three reasons why: "We also like that what we call the new nexus, meaning Walmart using artificial intelligence, Walmart using marketplace models, and Walmart embracing digital advertising. So, those three factors, digital advertising, marketplaces, artificial intelligence, they are key to long-term better operating margins. AI will play a big role during purchase, before purchase, after purchase."

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Video Transcript

- --as retail theft is just one of the headwinds that retailers faced in 2023. They were also hit with sticky inflation and a softening consumer. As we tracked these companies throughout the year, time and time again, a few stood out on top as consumers looked to value when spending. Here to analyze the year that was and give his outlook for 2024 is Oliver Chen, TD Cowen senior research analyst, plus we still have our very own Brooke [? DiPalma ?] with us.

Oliver, great to see you. When you look back at 2023, how good of a year was it for retail, and how much did theft really factor into the big picture?

- Yeah, [INAUDIBLE]. It's been mixed in terms of the consumer. On the one hand, inflation has been a headwind for sure, and consumer discretionary trends have been more negative as inflation has taken away dollars. That being said, there's still a lot of spending power. Unemployment is low at below 4%. $700 billion of savings on the sidelines. And we had a better than feared Black Friday.

People are going back to stores. Store traffic is slightly positive. But there aren't all winners. There are winners and losers, aspirational luxury, more entry price luxury has been a tougher place. Discretionary has been a tougher place. And people have been spending on essentials, such as grocery and beauty. At Walmart, we like the grocery exposure, which is about 60% of revenues. We also like that what we call the new nexus, meaning Walmart using artificial intelligence, Walmart using Marketplace models, and Walmart embracing digital advertising.

so those three factors, digital advertising, marketplaces, artificial intelligence, they are key to long term better operating margins. AI I will play a big role during purchase, before purchase, after purchase. Specifically, we're out with a book today. We think AI will impact merchandising labor and inventory, and this could improve return on invested capital as well as improve margins as well.

- And Oliver, just to bring it back to retail theft like we just discussed. Yesterday there was a hearing on the Hill, and a Home Depot executive said that passing the combating organized retail Crime Act of 2023 would be a critical step to solve this issue. Do you think this legislation would help retail theft?

- Yes, [? Sean. ?] I think people do need to collaborate, and over a longer time, horizon certainly. What we see happening is the rise of technology platforms that allow resale as a been a factor in driving shrink. What retailers can do within their control in the near term and they are doing is people and fixtures. And there's been investments there. So it's something we're watching. Unfortunately, some of the higher value items such as personal care fragrances beauty, luxury those have been items that have been more likely to be stolen.