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Class Is Now In Session: How Will Retailers Fare This Back-to-School Season?
It’s that time of year again, when children across the country are getting ready to head back to school. With more than half the summer already over and retailers out with their back-to-school merchandise, parent shoppers are preparing to scour the stores to buy everything from backpacks and pencil cases to clothing and accessories for their little ones. The back-to-school-event is just as big for college-aged kids, with dorm-room furnishings/décor and electronics among the items that top the list of must-haves for those heading back to campus.
It is certainly not surprising that spending often rises around the back-to-school period. After all, that is when necessary (and generally required) scholastic supplies are replenished. Wal-Mart (WMT – Free Wal-Mart Stock Report), Staples (STPL), and Office Depot (ODP) should see a mad rush for their materials. What’s more, kids grow, so they need new clothes, not to mention shoes to go with their outfits. And what better time is there to show off the latest fashions than at the start of a new school year? That means mall traffic is bound to pick up through this month.
Although the struggling economy in recent years has weakened overall consumer spending activity, shopping for that first day of classes has not necessarily taken a back seat. From the looks of it so far, the same may well hold true this year. In fact, industry data suggest retail sales related to back-to-school merchandise stands to increase in 2012 versus last year, when spending was flat. According to a survey conducted by the National Retail Federation, average back-to-school spending is expected to rise 14% for 2012, partly reflecting a greater number of children entering school from grades K to 12. The projected spike in spending is also partially attributable to higher prices for many items on the back-to-school shopping list and bigger-ticket items, such as electronics. More and more, it seems electronic devices, including smartphones, tablets, and MP3 players, are becoming back-to-school essentials. Therefore, Apple (AAPL) will probably benefit from this trend.
Back-to-school spending for kids grades K to 12 is estimated to be over $30 billion, while spending for college students is likely to reach a whopping $53.5 billion, for a combined total of nearly $84 billion. Retail sales for July seem to support the notion that parents will shell out big bucks for the back-to-school season that just kicked off. Industry figures gathered by retail tracking firms show that overall comparable-store sales (for stores open at least one year) were up more than 4% for the month, driven largely by summer clearance and hot weather.
Meanwhile, sales from a number of retailers during the latest three-month period were quite good. And the momentum ought to continue. Discount merchants Target (TGT), TJX Companies (TJX), and Ross Stores (ROST) were among the strongest performers, as were department store chains Kohl’s (KSS) and Macy’s (M). Specialty retailers The Gap (GPS) and Limited Brands (LTD) also did exceptionally well, posting double-digit comp-store sales gains. The teen retail space, on the other hand, saw mixed results, with Hot Topic (HOTT) and American Eagle Outfitters (AEO) coming out on top, and Abercrombie & Fitch (ANF), Wet Seal (WTSLA), and Zumiez (ZUMZ) disappointing.
As upbeat as the recent news appears, a few other metrics give us pause. Indeed, while the Consumer Confidence Index showed an uptick for the first time in five months, it is still well below historical levels. Chances are consumer confidence will remain subdued until there is a meaningful pickup in hiring trends. Furthermore, a range of other macroeconomic factors including, persistent high unemployment, a fragile housing market, fairly tight credit, a high savings rate, and anemic wage increases, are likely to weigh somewhat on the minds of consumers through the back-to-school season. These could temper consumer spending, which accounts for roughly 70% of economic activity.
With all that said, the latest data still give a sense of optimism, even in the face of an uncertain economic backdrop. Granted, retailers will probably remain aggressive with promotions, as budget-conscious shoppers continue to focus on value. To get the most for their dollars, many shoppers are likely to not only hit department stores and discount chains, but also shop online, where special offers and other money-saving incentives (i.e., free shipping) make it more enticing and convenient to stock up on back-to-school items with just the click of a button. An estimated 40% of parents plan to make purchases this way, many using their smartphones. Adding it all up, a solid back-to-school season is probably on tap for retailers.
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At the time of this article’s writing, the author did not have positions in any of the companies mentioned.