Daily Gains Letter

Back-to-School Season Disappointing for Retail Sector

By for Daily Gains Letter |

Retail SectorStudents aren’t the only ones unhappy this back-to-school season. U.S. companies in the retail sector, which rely on back-to-school shoppers to propel their mid-year sales, are also despondent. Perhaps not surprisingly, August’s bearish consumer sentiment reading of 80.0 has translated into tepid spending on everything back-to-school, including clothing, backpacks, shoes, notebooks, and laptops. (Source: “U.S. consumer sentiment weakens in August,” Reuters, August 16, 2013.)

August sales in U.S. chain stores climbed a modest 3.7% year-over-year; that’s up a sliver from July’s 3.5% gain, but down significantly from the six-percent gain reported in August 2012. While some U.S. retail sector stocks reported stronger-than-expected August sales, many had to resort to slashing prices to get there. The Gap, Inc. (NYSE/GPS), one of the biggest apparel metrics, said August sales were up three percent. (Source: “August Chain-Store Sales Post Gain of 3.7%,” ICSC.org, September 5, 2013.)

Next to the winter holidays, the back-to-school season (which runs from mid-July to mid-September) is the second-biggest period for shopping. And in an effort to boost mediocre revenues in the third quarter (ended September 30), many stores in the retail sector are expected to continue offering even steeper discounts.

While back-to-school sales are not the most reliable predictor for how the American retail sector will do during the November and December shopping seasons (which can account for 40% of annual sales), they are a good reflection of ongoing consumer confidence—and the American economy as a whole.

Sure, the average American homeowner has (apparently) seen their personal wealth increase as a result of a slightly improving housing market, but that’s all on paper. Most Americans are faced with stubbornly high unemployment and the day-to-day reality of stagnant wages and a higher cost of living—not the perfect conditions for an economy that relies on consumers to drive 70% of all gross domestic product (GDP).

But not all stocks in the retail sector are facing the same headwinds. Retail sector stocks on either end of the spectrum seem to be doing better than those parked in the middle. Consumers looking to save money on back-to-school purchases have been turning to discount retail sector stocks. For example, discount retail sector stock Dollar General Corporation (NYSE/DG) reported record second-quarter results. Same-store sales were up 5.1%, total sales increased 11.3%, and net income was up 15%.

While August month-over-month sales in the apparel segment were particularly soft, this was not the case for all apparel retail stocks. After sidestepping a major mishap, one apparel stock has rebounded and is back in demand.

This past spring, lululemon athletica inc. (NASDAQ/LULU, TSX/LLL) fell out of favor with investors and yoga moms after it was revealed that some of its women’s yoga pants were a little too transparent. But that was then, this is now: it’s post-see-through recall, and the demand for Lululemon’s core yoga wear products remains strong. During the first quarter, the company announced that same-store sales increased seven percent, lifting net revenue 21%.

While the company is expected to report in-line second-quarter results with seven-percent same-store sales growth and $0.34 per share earnings, this retail sector stock is positioned to capitalize on the second half of the year. That’s because the company will have fully restocked all its previously recalled yoga-style pants.

While demand for many U.S. retail sector stocks has been mediocre at best, during the back-to-school shopping season, it hasn’t been all bad. Many consumers have been turning their attention to discount stocks in the retail sector to stretch their dollar, and in this economic climate, they will continue to do so for the foreseeable future.

It’s not all doom and gloom: consumer demand for a once-maligned retail sector stock has returned. And when it comes to high-end yoga gear, some back-to-school consumers will do whatever they can to look fashionable.

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