Manager's Perspective: Does back to school still mean back to the mall?
Matthew P. Kaufler, portfolio manager, discusses the important “back-to-school” shopping season and the prospects for a strong retail session this year in our current muddle-through economy.
There’s a lot of hand-wringing that goes on in the month or two leading up to back-to-school, the shopping season when backpacks, clothes and electronics go flying off the shelves. Will parents actually show up at the stores, or will retailers have to slog along through autumn without 'em?
Consumers seem to be keeping their wallets in their pockets right now, but it might be a mistake to assume a soft summer sales season means a disappointing fall. Most years, actual back-to-school retail performance comes in better than was feared during the dog days of summer. The month of July is one of the least significant months for retailers in terms of sales volume. It’s a time when retailers are hanging out the clearance signs in an attempt to move summer goods and make room for fall and winter merchandise. It’s more important that retailers have their merchandise in place for the back-to-school season, which really doesn’t start to kick in until late summer and early fall.
Despite an unemployment rate stuck around 8.3%, we wouldn’t be surprised to see more spending on back-to-school this year than we did last year, possibly an uptick in the 2% to 3% range. Remember, the back-to-school season is driven by children and teenagers, and by parents who want their kids to head off for the school looking nice and equipped with what they need to start the year right. Parental guilt is an awfully strong motivator, so when Junior begs for a particular item or two, parents will reprioritize to come through for them. Barring an abrupt spike in unemployment, or a geopolitical event that disrupts consumer behavior, we’re likely to see some year-over-year growth in retail sales this fall.
Which sectors will make the grade?
When looking at the different sectors of the market, we see a real mix. Across the retail landscape, the high-end luxury segment seems to be weakening. Looking at Saks, Nordstrom and Coach, for instance, we’re seeing a weaker trend line than has been the case over the last few years. The mid-range sector, however, with companies such as TJX, Macy’s, Ross Stores and Kohl’s, is showing a good deal of resilience. The notable exception, of course, has been J.C. Penney, a company going through a deep, painful transition, and one that’s literally imploding as we speak. Prospects seem to be mixed for another notable sector of the market, specialty retailers who sell a narrow category of merchandise. Gap and The Limited are now doing extraordinarily well after multiple years of stagnation. On the other hand, some niche retailers such as Wet Seal and Aeropostale, which are geared to a younger and more fickle market, are struggling now. These basic trends, with the upper end of the market showing some weakness, the middle sector doing well, and the specialty sector being mixed, are likely to continue for the foreseeable future, particularly through the important back-to-school season.
Some of this came about as a result of carefully planned repositioning. Gap is a perfect example. Gap had been off target for the last five years, but has recently gained some momentum. It’s made some management changes, reduced its store base, and, for the time being, seems to be focused on the fashions kids are looking for. As a result, Gap’s stock is up 100% on a year-over-year basis. And companies such as Macy’s and Kohl’s have put in a great deal of work in recent years in trying to capture younger shoppers. Throughout the 1990s, that business was going to the specialty retailers in the malls, but a fair number of those stores have gone out of business (remember Merry Go Round?) and that businesses has started returning to the department stores.
Technology will continue to be a big part of the back-to-school sales. iPhones and iPads might seem like highly discretionary purchases, but when consumers deem a product to be a “gotta have” item, price concerns seem to evaporate. Even at the height of the recession, when headlines focused on penny-pinching consumers, Apple stores had lines around the block. The reality is if they perceive value, consumers will splurge on all kinds of purchases, whether it’s technology, apparel or footwear. That value might be related to quality or durability, or it could be value in terms of social status. There’s a lot of value for a kid in having an iPhone instead of another type of phone. (Just ask your teenager.) And there are a lot of parents out there, even those on stretched budgets, who want to make sure their kids are happy.
The online learning curve
Online retailing, which has been on the scene for least 15 years with no end in sight, may continue to siphon away sales from the brick-and-mortar world, but the two sales channels are not necessarily mutually exclusive. Brick-and-mortar stores aren’t going away—there are some items, such as clothing, that you really need to see in person and try on, and that will never change. But those who have an online capability, even if it’s defensive in nature, are going to see less bleeding than others who stick their heads in the sand. Macy’s has made tremendous strides in online retailing, integrating the effort into their brick-and-mortar business, so customers can order online, and then pick up at a local store, saving delivery costs. Other retailers, who aren’t exactly embracing the world of online sales, might not be so lucky.
Bottom line, even when budgets are tight and the future is uncertain, your average parent standing at the mall looking into the pleading eyes of a child is probably going to buckle under the pressure and pull out that credit card. Trust me—no one wants to ride home from the mall with a disappointed teenager.