The Back-to-School Bust Could Butcher Your Returns

Though it pales in comparison with the all-important holiday season, the back-to-school shopping season is a boon to retailers -- usually, anyway. This year, signs point to a whole different world facing retail stocks. Back-to-school may be a bust.

Hey! Where is everybody?
The New York Times reported a phenomenon you may have noticed in your own shopping excursions in recent weeks: Many kids and parents are waiting until after school starts to buy clothes and supplies.

According to the article, Wal-Mart (NYSE: WMT  ) reported delayed back-to-school spending, and a tendency to buy only necessities. Office Depot (NYSE: ODP  ) reported that some shoppers waited for lower prices, even on simple, basic supplies such as pens and notebooks.

Oddly enough, even as shoppers penny-pinch on the basics, they may be more willing to buy electronics for back-to-school purposes. American Express Spending and Saving Tracker recently reported that 9% more U.S. shoppers planned to buy e-readers and tablets as "necessities" for students this year.

That's good news for companies such as Apple (Nasdaq: AAPL  ) and Amazon.com (Nasdaq: AMZN  ) , perhaps, but probably bad news for the retailers such as Wal-Mart that are relying on having tons of consumers grab up different kinds of inventory.

The changing teen scene
The New York Times pointed to another reason for delayed shopping: a sketchy fashion landscape, where some teens are waiting to see what their peers have deemed the must-have items before committing to their own back-to-school wardrobe. Trends may be in flux, and items like retro-'80s colored jeans and LeSportsac gear could be yesterday's news tomorrow.

The most interesting thing about the teen angle is the idea that, in a departure from the bubbly boom times, even this reason exhibits teens' new frugality and tendency to be choosier about purchases. One of the things that used to be tantalizing about the teen retail space was a demographic that tended to be populated with profligate spenders.

Not anymore, apparently. In May, evidence that many of today's teens dig clothing swaps pointed to a new kind of penny-pinching youngster whose idea of new duds doesn't necessarily mean brand-new. This behavior doesn't bode well for teen retailers such as Abercrombie & Fitch, which built brands on full-price, aspirational apparel sales and on teens that come back for more over and over again.

The teen retail landscape is an evolving animal. Many parents have less discretionary money to hand over to kids, and teen unemployment has been high for three years running as youngsters compete with far more experienced and responsible adults for even low-wage jobs. In April, teen unemployment hit 24.9%, and it's even worse in some major urban areas.

Don't go for bust
Back-to-school may be a bust, but it underlines other trends. For example, the American Express survey showed that 68% of parents who responded planned to give up some of their own needs to finance back-to-school purchases for their kids. Such sentiments could hit restaurants, entertainment, and adult clothing purchases.

Furthermore, today news broke that August consumer confidence has plunged to 60.6 from July's 65.4, the biggest decrease since last October. High gas prices and continued unemployment are taking a toll on Americans' sense of economic well-being.

The retail landscape isn't an easy one right now, and retailers of all kinds must balance inventory, consumers' changing habits and fashions, the demand for lower prices, and many other moving parts as the economy continues to stagnate.

As always, the best way to navigate such a climate is to choose the strongest retailers with the best brands. Costco (Nasdaq: COST  ) and Amazon strike me as solid examples of stable holdings in the space: Both have excellent managements, enjoy tons of customer loyalty, offer discounted prices, and attract many different kinds of shoppers.

If retail stocks are on your shopping list -- or already reside in your portfolio -- remember that the macroeconomic environment is changing the rules of the game. Assess the space carefully, and remember that the difficult consumer spending environment could result in far more losers than winners in that segment in the near term.

If you'd like to read more about Amazon.com's standing and opportunities to become the Wal-Mart of the 21st century, we've created a premium report from one of our top analysts that drills down on the e-commerce giant; learn more.  

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Amazon.com, and Apple, creating a bull call spread position in Apple, and creating a write covered strangle position in American Express. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2012, at 10:07 PM, 123spot wrote:

    WMT is the WMT of the 21st century. You've got to be completely out of touch with the increasing numbers of the poor middle class and the poor themselves to not realize the superior value of being able to buy gas/clothes / school supplies/ groceries at the lowest price one stop shop in nearly every town (and moving into the most desolate areas of our cities to serve even better ). Yes, I am a cheerleader for WMT, I am long WMT for a very long time. Even as a Democrat, I appreciate how they are working to change the failures of their past, and grow in a better direction.

    AMZN and COST are wonderful companies, but for many inaccessible and inconvenient. Sell WMT at your own risk. Spot

  • Report this Comment On August 29, 2012, at 1:28 PM, Darwood11 wrote:

    The middle school that I am involved in has a really comprehensive list of supply requirements for students. Copies are in racks at the nearby Office Depot and other office supply stores, along with the lists of other nearby schools.

    Parents will fill those lists, where and how I cannot surmise.

    "The retail landscape isn't an easy one right now..." Yes, indeed.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1999566, ~/Articles/ArticleHandler.aspx, 12/20/2014 10:22:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement