BMO managing director Simeon Siegel joins Yahoo Finance Live to discuss retailers’ performance in the third quarter, what names he thinks are reinventing themselves and his outlook for the holiday season.

Video Transcript

- We have been talking for years about the difficulty that retailers have had in raising prices, in stopping discounting. Is it going to be a pandemic that is finally going to end that really persistent discounting trend? Because I know one of the things you're looking at this season is gross margin expansion.

SIMEON SIEGEL: Hey, Julie. And yeah, we've seen the best gross margin expansion in years. And whether the retailers are appreciating that because they don't have enough product to sell, or whether the consumers are going to miss out on discounts, the reality is we're seeing it happen, it's going to happen. There's less product, people are selling less, charging more. And the crazy enough part is they're actually making more money because of it. And I think that's actually incredibly positive for retail as a whole and for retail going into next year. Because when '08 happened, we had stockpiles of inventory that left us five years of promotions in the making. That's not happening this time.

- Simeon, how concerned are you that compared to last year, a lot of these anchor stores like a Macy's, I guess the rotting carcass that is JC Penney-- those anchor stores and mini malls are not there to drive traffic to a lot of specialty to retailers like a Gap, like a Lululemon-- how will that impact those retailers?

SIMEON SIEGEL: Brian, I always love your metaphors. I think that you're absolutely right. I think on the one hand, it's interesting-- we hear about this pandemic being an accelerant for all the trends we've seen-- i.e. department stores will get smaller, off price and ecom will get larger. On the other hand, we have this flip side of the equation, where it's actually a Band-Aid and a medicine for retail, because consumers are being taught they're actually not as in charge as they thought they were if promotions are going down.

So I think that we're going to see this blend of the weak and the structurally challenged aspects within retail are not magically getting better. They're going to get worse. But those that were perhaps about to embark on the wrong path or the ones that were essentially falling prey to mistakes, but structurally we're viable, they have a lot-- they have this opportunity to kind of completely reinvent themselves. And I think that's what's exciting.

- To talk maybe about some of those names, Simeon, that you think are reinventing themselves in this kind of environment-- because it's also interesting, and as you're talking about the five years of promotions we had after 2008, I mean, then we also saw this whole boom in this venture-funded kind of DTC sort of model that kind of worked, it kind of didn't really work. And I guess I also hear you saying we might not see that sort of cycle on the other side of this crisis?

SIMEON SIEGEL: Yeah, these venture-funded, isn't that the coolest part of this? I think that one of the things I was most wrong on looking back over the last five months was I probably thought this was going to be the day of reckoning for all these VC-funded profitless companies. And the reality is a lot of them thrived. A lot of them pivoted, a lot of them marketed correctly, a lot of them appealed to the right messaging. And for better or worse, coincidentally or not, a lot of them [INAUDIBLE]. So I think that where we lie right now is if you have a brand that people want, the ability to charge higher prices means that whether you're VC-funded or whether you have an infinite amount of stores, you at least have a chance. It doesn't mean you have a guarantee.

And so what's interesting is you're mentioning these digital natives, which I think a lot of them are thriving. On the other hand, we can look at the total other side of the spectrum, we've talked about Victoria's Secret and Under Armour a lot on this program-- these are brands that we all thought were dead, but they were still selling $5 billion worth of product. So I think we found out they weren't dead. They were sick and now they're getting better. So I think that's the key. And that's what we've been looking for.

We've been looking for big brands that have consumer buy in that we're not making money, because that's what pulling back promotions can do in a way that closing stores can't. So I think that any brand right now should take this opportunity to say, who do I want to be? How much should I charge to get there? And most importantly, I don't need to always sell more. I think there's a level where the incremental sale becomes a detrimental sale, and that's not a good thing, and that's what this is allowing us to do, whether you're small on a startup or whether you're large and a public company.

- Simeon, let's stay in the mall. Do you like the fact that Peloton is still operating over 100 physical retail stores and they look likely to open more? And then secondarily, do you get the sense that they are starting to get more supplies of their bikes into those stores, back online so they could have a good holiday season?

SIMEON SIEGEL: Yeah, so I think it's such a great point. I think that they're healthy is up until this year, we talked about omnichannel. Now for the pandemic, we're talking about pandemic-- I mean, we're talking about e-commerce. We're forgetting it's supposed to the omnichannel. Stores are important. And whether it's Peloton, whether it's some of their competitors, or you're watching Tonal open up left and right, or whether it's traditional retail, you need to have a physical presence that will go along, that will help your e-commerce channel.

And I think that at home fitness absolutely is here to stay. I think that it seems like we're on the very beginnings of what this as an industry looks like. I think we're seeing a whole host of competition enter the fray. And I think that ultimately, that's going to complement gyms rather than substitute gyms. So I think that teaching the consumer a new product, which the Peloton Bike is absolutely new product, or Tonal or any one of these is a new product, is very important to have a physical manifestation of that selling experience. And I think that ultimately, is probably a lot cheaper to find real estate these days than it was before. So it even changes the economic dynamic.

- Simeon, and as you look across at your coverage, what's the company that has done the best this year, has handled things the best? And then is best positioned going into the holiday season?

SIMEON SIEGEL: Yeah, so I think it's rare in retail or probably in any scenario that you have a company that has both the strongest concept in retail and one that arguably had to do the most correcting, and that is L Brands. And I know, Julie, you and I talk about this one a lot, but Bath and Body Works has just capitalized so incredibly on being able to sell a product in terms of soap and sanitizer that people want. At the same time, they also sold much more candles. But on the flip side, you have incredible strength on that side of the portfolio, and then what we're finding is Victoria's Secret is-- I mean, they bought inventory down 50%, 5-0, and yet watch profits go up. They literally shrunk sales and grew revenue-- grew profits.

So I think they are a perfect example. I think there are a lot of others that are doing it, as well. But in terms of your question, what is the number one, I think we have one brand, one company here, which has an incredible grower and a shrink to grower all sandwiched into one. The stock has obviously been very strong year to date. But if you look back three years, it's hardly scratching.