Walmart (WMT) beat third-quarter earnings estimates but softened its guidance for the remainder of the year, claiming cautious optimism for the upcoming holiday season as inflation remains an issue for consumers. On the earnings call, Walmart CEO Doug McMillon said “we may be managing through a period of deflation in the months to come [in the US]," referring to the prices of groceries and other select goods.

Piper Sandler Managing Director and Senior Research Analyst Ed Yruma joins Yahoo Finance to discuss how deflation can affect retailers like Walmart, Target (TGT), and TJX Companies (TJX), and what challenges they face for the upcoming holiday season.

"TJX continues to take market share. They had very strong results yesterday, they're taking share within apparel, they're taking share within home, we think from some of these Bed Bath & Beyond stores that have closed..." Yruma says on which retailer may be in the best position to handle said challenges. "So I think someone like a TJX, because the consumer wants these products, they want apparel, they want beauty, they want home, they want this for the holiday. But, they want to be careful with what they spend and I think TJX offers consumers great value."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

JOSH LIPTON: And what about these comments from Walmart execs, specifically when they talked about perhaps deflation in the months ahead is what they might be seeing? What would that mean for Walmart's business and margins if that's true?

ED YRUMA: Look, that's the big question, right? So clearly, deflation will impact top line. And the question is, does the consumer buy more units, right? And so you could see a scenario where maybe you buy an extra toy or two for your kids, but probably not buying an extra bottle of ketchup, right? So I think there are some areas where there is elasticity and you'll buy more units. There are other areas we're just going to put that money back in your pocket.

And so I think that's something that, again, we're having to work through our models and think through because it's an environment that candidly we haven't seen in a while.

JULIE HYMAN: And so, Ed, you know, your coverage universe is pretty diverse within retail, right? You cover a Walmart and Target and a TJX, who we just heard from as well. But you also cover Warby Parker. You cover some of the resale companies like a thredUP and a RealReal. As you look at the ones that we've heard from thus far and the sort of ensemble, who in that universe can do well in this environment or at least better in this environment?

ED YRUMA: I mean, I think TJX continues to take market share, right, that very strong results yesterday. They're taking share within apparel. They're taking share within home, and we think from some of these Bed Bath & Beyond stores that have closed. Interestingly, they also highlighted beauty as an opportunity, right? This is a category that off price hasn't traditionally been as strong in.

And as we visited their stores, we see them making significant headway there. And so that's a big opportunity for them. So I think someone like a TJX because the consumer wants these products, right? They want apparel. They want beauty. They want home. They want this for the holiday. But they want to be careful with what they spend. And I think TJX offers consumers great value.

JOSH LIPTON: And what about this other issue of, we heard so much about shrink, retail theft. In your coverage universe, Ed, does that issue seem to be more in control now?

ED YRUMA: You know, I don't want to say more in control. I would just say it's less surprising, right? I think we're starting to see the curve flatten out. I think we're starting to hear more about local municipalities that understand that if this problem isn't dealt with, then they will lose stores in their cities. And so it does seem like the retailers, local governments are at least more aligned than they were 12 months ago.

So I don't think it's not a problem. I think shrink levels are still elevated. We haven't seen them come down, but they're not increasing the way that they did last year.

JULIE HYMAN: Does it feel like that problem is kind of the peak of it is behind us?

ED YRUMA: It's possible, right? And ultimately, a retailer would tell you that the consumer will pay for shrink, right? It will get added to the cost of an item. And so if shrink rates are stable, then retailers can kind of price against that. So it does feel like hearing them call it out on conference calls as being a headwind to the business is probably largely behind us.

JOSH LIPTON: Ed Yruma, thank you so much, Ed, for joining us today for that time and insight. We really appreciate it.

ED YRUMA: Thanks.