Idea of the Week: Back to School Winners and Losers

The Fourth of July weekend is over and in the look-ahead retail world, that means back to school season is around the corner. Store chains are clearing summer inventory to make way for fall merchandise. However, companies with lots of brick-and-mortar stores are looking over their shoulders at competition from Amazon as parents continue to gravitate towards shopping online for school supplies.

Amazon’s “Prime Day,” July 12, when it offers lots of discounts for its “Prime” customer members, saw more sales than last year. Many used Amazon’s mobile app for Prime Day, which bodes well for the online giant going into the back to school season. Accordingly, other retailers sweetened their online deals to compete more effectively during this period, including free online shipping with no minimum order amount.

Early in the summer, Brexit worries contributed to a drop in global consumer confidence. Following the British vote to leave the European Union, the U.S. stock market plunged, then recovered. As the summer wears on, parents budget for back to school expenses, no matter how the U.S. economy is faring, according to our research at Thomson Reuters, therefore we could see an uptick in consumer spending.

Among older students and young parents, millennials (ages 18-34) make up the biggest consumer spending group. They’re currently out and about enjoying the summer, ahead of hitting the malls for back to school shopping. This group prefers experiences over things, so are in no rush to make big purchases. Parents also are very value driven now and are likely to shop in August to take advantage of the tax free holidays in some states.

August marks the first month of the retail industry’s third quarter. Back to school shopping also continues in September as students return to school, eye what their classmates are wearing, then buy the latest trends. Furthermore, shoppers love to procrastinate until the last minute. Retail sales will also receive a lift from Labor Day promotions.

All this will help boost the Q3 2016 same store sales (SSS) cycle which consists of August, September and October. Currently, the Thomson Reuters SSS Index is looking at a 1.3% gain in Q3 2016, slightly below last year’s result. However, this number is an improvement from the 1.0% rise anticipated for Q2 2016 (vs. 1.4% SSS Q2 2015).

Who will make the back to school grade?

Exhibit 1. Strongest SSS Estimates for Q3 2016

Source: Thomson Reuters I/B/E/S

Spade sales

Fashion icon Kate Spade has the highest SSS estimate for Q3 in our retail universe at 12.2% vs. 16.0% last year, followed by Ulta Cosmetics. Kate Spade recently lowered its full-year guidance as its second quarter was hit by dismal outlet sales, and weak tourist spending. Still, Kate’s stationery, planners and pens are more appealing to the young adult student and the high-end student for the back-to-school season.

What’s more, students like to make a lasting impression on the first day of school. Teenagers are expected to shop at Ulta Cosmetics for beauty essentials. This retailer is expected to post the second strongest SSS estimate for Q3 in our retail universe at 9.9% vs. 12.8% last year.

Other winners include American Eagle’s Aerie division, which sells lingerie for girls. The division is facing difficult comparisons from last year when it posted an impressive 21%, and is now expected to post a 6.8% SSS. (In general, a 3.0% gain reflects healthy consumer spending.) Thus, 6.8% on top of a difficult comparison from last year is considered a robust performance. Other teen retailers that used to compete neck to neck with American Eagle (including Abercrombie, Aeropostale) haven’t been performing well. Aerie has also been praised for not photo-shopping its advertisement pictures and teens love the denim sold by its parent company.

Among the strongest 15 SSS performers are Lululemon, TJX Companies, Footlocker and home supply stores to decorate those dorm rooms. Athleisure is a hot trend that is boding well for Lululemon, which has a 6.0% SSS vs. 9.0% last year. As students are moving to college, Home Depot and Lowe’s are getting a boost from organizational kits and are expected to post a 4.6% SSS, and 3.8%, respectively. New shoes are always a staple, and Footlocker is expected to post a 4.4% SSS, below last year’s 8.7%. Despite weakness in Europe, TJX and its international divisions are doing well. The retailer is benefiting from the fact that value shopping is very popular among consumers worldwide right now.

Other standouts include Urban Outfitters and fast fashion retailers. Urban Outfitters is a retailer that is starting to perform stronger than a year ago. Analysts polled by Thomson Reuters believe the retailer is in great condition for the fall season with 1.6% SSS estimate, above the 1.0% SSS result from Q3 2015. When it comes to the latest fashion trends, analysts polled by Thomson Reuters agree that fast fashion retailers are well positioned, including Zara, H&M and Forever21. They have been doing a good job staying on the forefront of the latest fashion trends. As a result, their merchandise has been selling well; moreover, after a long slump in apparel sales, consumers are finally opening their wallets again to purchase the popular fashion trends.

Who might need some extra credit?

Exhibit 2. Weakest SSS Estimates for Q3 2016

Source: Thomson Reuters I/B/E/S

Weakness in Europe

Analysts polled by Thomson Reuters are bearish on retailers with European exposure. Their retail sales are hurting, including Staples’ European division. Similarly, Office Depot is looking at a -1.5% SSS, below last year’s 3.0% SSS result. Meanwhile, department stores continue to experience weak traffic and sales. Once upon a time, parents flocked to the department stores as a one-stop shop to purchase back to school gear. Today, however, Sears, Macy’s, Stage Stores and JW Nordstrom’s full line stores are all expected to post the weakest SSS (Exhibit 2).

On the flip side, parents with passion for value shopping are going to the discounters; both Dollar General and Dollar Tree Stores are expecting to post stronger SSS than a year-ago at 3.1% and 2.6%, respectively.

Meanwhile, Old Navy is on track to post a lackluster -2.3% SSS, which is unusual since the retailer has been a favorite during back to school. Likewise, Gap’s Banana Republic division has a -3.1% SSS estimate. Still, it’s important to note that both the Old Navy and Gap concepts have seen an improvement in merchandise offerings, selling on-trend styles that are doing well.

Other teen stores that are hurting include The Buckle and Zumiez.  Aeropostale and Pacific Sunwear of California filed for bankruptcy. Meanwhile, Cato Corp. and Express Inc., geared more towards junior/misses, are both hurting at -2% and -2.5%, respectively. Abercrombie has exposure in Europe and is also being hurt by weak tourist spending in the U.S.

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