It may still be beach weather, but retailers are stocking the shelves with student gear and fall clothes for the back to school season. The first weekend in August is usually quite busy, since a dozen states have declared a tax holiday, with others suspending taxes later in the season. Although families are still looking for value, consumer confidence is up and students want to hit the classroom in the latest look. What are some lessons for investors?
It seems that traditional teen retailers specializing in the all-American look may be the losers this season. Abercrombie & Fitch (ANF.N), American Eagle Outfitters (AEO.N) and Aeropostale Inc. (ARO.N) have been closing stores and losing market share to fast fashion retailers.
Students are now willing to pay full price for unique outfits, from flower child headbands to the 90s grunge look. Watch out for Forever 21 Inc., H&M Hennes & Mauritz AB (HMb.ST) and Zara, owned by Inditex SA (ITX.MC). These retailers grab the latest runway fashions and offer it almost instantly at low prices. This season, kids want bold, pop-art prints (lips, animals, food), similar to Andy Warhol’s art, with kitschy quotes, paired with cowgirl or open boots.
Many students return to school in September, eye what their classmates are wearing, then hit the malls. Also, shoppers love to procrastinate until the last minute. Labor Day promotions will also affect September sales figures.
All this will help boost the Q3 2014 same store sales (SSS) cycle which consists of August, September and October. Currently, the SSS Index is looking at a 1.3% gain in Q2 2014, slightly below last year’s result. This number is expected to rise to 1.6% in Q3 2014 (vs. 1.9% SSS Q3 2013).
It pays to be different
Compelling fashion trends are expected to benefit Free People, owned by Urban Outfitters Inc. (URBN.O). Free People has the strongest SSS estimate within our retail universe for Q3 2014 at 15.4% on top of a very difficult comparison of 30.0% in Q3 2013.
We believe H&M, Zara, and Forever 21 will be popular this season. The latter is a privately-held company, however, it is clear by the long check-out lines and expansion that this retailer is poised for growth. CEO Don Chang told Women’s Wear Daily that his “ultimate goal is to double the size of our company within the next three years,” to about1,200 stores globally (Source: WWD, 6/30/14).
For Q3 2014, H&M is expected to see a jump in earnings and revenue of 11.8% and 12.9%, respectively. The StarMine Earnings Quality (EQ) model score of 99 suggests that its profits are coming from sustainable sources. In the chart below, operating profit margin at H&M has remained consistently steady for a little bit over a year and is now 17.3%, much higher than the industry median of 8.4%.
Exhibit 1. H&M Operating Profit Margin
Source: Eikon
Zara – a strong brand
ZARA’s parent company, Inditex, is expected to see a jump in earnings and revenue for Q3 2014 of 13.0%, and 8.2%, respectively. The StarMine Analyst Revisions Model (ARM) model score of 90, indicates that analysts are likely to continue increasing earnings forecasts as the quarter progresses. So far, stock recommendations have moved towards a stronger “buy” and fewer “hold/sell” recommendations.
Exhibit 2. Industria De Diseno Textil Sa. Stock Recommendation
Source: Eikon
In terms of value, Old Navy is offering back to school (B2S) merchandise starting at $4. The retailer is a favorite during this season with a 2.9% Q3 2014 SSS estimate, on top of a flat comp last year.
Which retailers will earn an A+?
Looking at the overall picture for Q3 2014, shoppers are still prioritizing the stay-at-home experience. Home improvement and furnishing stores including Pier 1 Imports Inc. (PIR), Williams-Sonoma Inc. (WSM.N), Ethan Allen Interiors Inc. (ETH.N) and Home Depot Inc. (HD.N) are among the strongest SSS performers for Q3 2014 (Exhibit 3).
Among discounters, the middle class will be hitting Costco Wholesale Corp. (COST.O) for a one-stop shop, from filling up the gas tanks to grocery and school shopping. The retailer is expected to post a 5.2% comp, slightly above last year’s 5.0% Q3 result. On the flip side, in hopes to regain its core consumer, Wal-mart Stores Inc. (WMT.N) is incorporating more rollback activity, and making food categories more of a focus during B2S. The retailer’s U.S. division is looking at a 0.7% SSS estimate, above last year’s -0.1% SSS result.
Among the department stores, JC Penney (JCP.N) is also making a come-back for B2S with a 4.8% SSS, compared to a -4.8% SSS Q3 2013. Shoes are a staple for teenagers, and Footlocker (FL.N) has the strongest Q3 2014 SSS among the footwear names at 4.7% SSS, followed by Finish Line (FINL.O) at 3.7%. Both are on track to beat last year’s results of 4.1%, and 0.9%, respectively.
Exhibit 3. Top Performers – Q3 2014 Same Store Sales
Source: I/B/E/S estimates.
Which retailers are headed for an F?
Teen retailers Aéropostale, American Eagle, Abercrombie & Fitch and Wet Seal (WTSL.O) are all in the bottom performers with comps estimates of -6.2%, -3.0%, -2.3%, and -1.8%, respectively. Still, Coach (COH.N) has the weakest estimate in our retail universe at -28.0%, on top of easy comparisons from last year at -6.8%. The retailer is going through a major brand face-lift. Similarly, StarMine’s Price Momentum (Price Mo) model shows Coach doing worse than 91% of its peers. Other disappointments include Staples (SPLS.O), and Best Buy (BBY.N), which have been losing market share to online giants like Amazon (AMZN.O). Electronics are a must-have for B2S, and when it comes to tablets, Apple (AAPL.O) iPads are still a favorite. Meanwhile, Sears (SHLD.O) is the only department store on track to post a loss for Q3 2014 at -1.5% vs. -3.1% last year. Apparently, Sears’ Kardashian collection has not been as popular as the television show.
Exhibit 4. Bottom Performers – Q3 2014 Same Store Sales
Source: I/B/E/S estimates
Social media plays an important part
Retailers are looking toward the Teen Choice 2014 Awards Show in August, when kids will be tweeting and discussing fashion looks during the show. Candie’s shoes, exclusively sold at Kohl’s (KSS.N) department store, is using celebrity Bella Thorne. She will appear in a TV commercial during the awards show. Kohl’s is on track to post a 1.1% SSS estimate for Q3 2014 vs. -1.6% Q3 2013. Aeropostale is using YouTube sensation Bethany Mota, already featured in Teen Vogue.
Shoppers Feel Good
Finally, retail sales should feel the benefit of improved consumer confidence. The July 2014 Index of the Thomson Reuters/University of Michigan Survey of Consumers Consumer Sentiment is: 81.8. “More rapid job creation, higher wages, and gains in household wealth have eased the financial strains on households as well as supported more favorable buying plans for vehicles and household durables. (Source: Survey Results, 8/1/14). The upturn in consumer sentiment bodes well for retailers entering Q3 2014, although value-conscious shoppers are still looking for good deals.
Exhibit 5. the Thomson Reuters/University of Michigan Survey of Consumers Consumer Sentiment
Source: Eikon
Read more on this story with Jharonne’s interview with The Street here.
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