2 Back-to-School Stocks That Make the Grade

For retailers, the end of August means just one thing: back-to-school sales. Stores such as Target (NYSE: TGT  ) , Wal-Mart (NYSE: WMT  ) , and Staples (NASDAQ: SPLS  ) are offering fresh deals and creative promotions this year in hopes of pulling in more sales. However, there's a lot at stake for retailers since back-to-school shopping is the second most popular shopping season behind the all-important December holidays.

This year, total back-to-school spending including college will amount to $72.5 billion, according to the National Retail Federation. However, with the payroll tax rise and the economy sputtering along, most families will be looking for deep discounts when shopping for school supplies and apparel. This puts discount retailers at a clear advantage over rivals in the space.

What consumers want
With more cost-conscious consumers on the hunt for back-to-school deals, Wal-Mart and Target should do particularly well. This year, both retail chains are offering dollar deals on hundreds of school supplies. Shoppers can get Target's private-label colored pencils, crayons, and index cards for as little as $0.50, while Wal-Mart guests will find a selection of 250 school supplies each attractively priced around a buck.

This puts added pressure on office supply stores such as Staples. While Staples is offering back-to-school discounts of its own, it isn't a one-stop-shop like Wal-Mart and Target, which both sell apparel and accessories in addition to notebooks and highlighters. This could be a serious setback for Staples because "the biggest portion of back-to-school shoppers' budget will go toward new apparel and accessories" this year, according to the NRF.

Head of the class
Target and Wal-Mart offer a wallet-friendly alternative to retail mall stores. Not to mention, a recent ICSC survey found that nearly 29% of shoppers said they would shop at discount chains this year, up from 25%, according to The Wall Street Journal. While both of these names offer consumers convenience and value, I'm particularly fond of Target's back-to-school initiatives.

Families with college students are expected to spend around $836.83 this year on back-to-school apparel and supplies, according to the NRF. That's more than the $634.78 that families with school-age children will spend this year. Therefore, it's not surprising that Target is aggressively pursuing college shoppers.

The bull's-eye retailer is targeting college students this year with special after-hours shopping events at universities across the country. During orientation week at select college campuses, freshmen will be bused from their campus to nearby Target stores for entertainment, exclusive savings, and shopping. Additionally, Target is showcasing "Live Dorm Rooms" on five college campuses throughout August and Sept. According to the company, these are freestanding, glass-enclosed structures that are fully furnished with Target's dorm decor and occupied by a student. If that doesn't catch students' attention, I'm not sure what will.

During these exclusive shopping events, Target has the opportunity to convince students to sign up for a Target REDcard. This shouldn't be a hard sell considering Target REDcard holders receive an additional 5% off every item every day as well as free shipping at Target.com. Ultimately, this is a smart strategy for Target because its REDcard helps drives repeat business.

Through initiatives such as these, Target and Wal-Mart are positioning themselves as go-to destinations for all of your back-to-school needs. This is important because investors frequently use back-to-school sales as a gauge for how retail stocks will perform during the holiday shopping period.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


 

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