If you like what you read - Send this Newsletter to a Friend

Back To Profits With Back-To-School Sales + Vic Wisemann’s Thoughts on: ANF, GPS, AEO, BKE, JCP, TGT, M, TJX, SPLS, ODP, OMX

Vic Wisemann
InvestorsObserver
Featured Contributor

The big yellow buses are back on the streets and retailers hope they have done their homework and can get back on track with this back-to-school season. Last year's back-to-school and holiday seasons were the beginning of a dismal period for retailers. This year, with many experts predicting that we are coming out of the recession, back-to-school season may be the light at the end of the tunnel that retailers have been looking for.

This year, however, the recession has taken a bite out of back-to-school purchases. With many parents watching every dime that leaves the wallet or the purse, retail analysts said they expect spending to hit its lowest point in more than a decade, and there's little time left. The back-to-school shopping season is more than a month old and almost at an end.

Poor sales this time a year ago edged many retailers into bankruptcy and liquidation. Remember Circuit City? Others could go the way of the former electronics giant if this shopping season doesn't yield better results. Lucky for retailers, recent polls have shown signs that better sales may be just around the corner.

Read on  to see how back-to-school sales could put profits back in your portfolio.

A recent Gallup poll on consumer spending saw average daily spending rise to $79, its highest level this year and an increase of nearly 50 percent from the Aug. 2 figure of $53, a sign consumers are starting to partake in back-to-school shopping. During the Aug. 2-16 period, the poll also shows consumer confidence edging slightly higher, with 2 percent more of respondents saying the economy is getting better. These numbers might not mean a lot to the average consumer, but to retailers, these percentage points could translate into millions.

Retailers' poor July results suggest a tough back-to-school period.

In an ominous sign for back-to-school spending, teen retailers were hit the hardest. Sales for that group fell 12.1%. Among the outlets struggling were Abercrombie & Fitch Co. (ANF), the pricey teen chain, which reported same-store sales fell a whopping 28%, and Gap Inc. (GPS), which posted an 8% drop.

Even Aeropostale Inc. (AEO) and Buckle Inc. (BKE), two youth-oriented clothing chains that have outperformed their peers this year, posted weaker gains in July than previous months. Aeropostale reported a 6% same-store sales increase, compared to a string of mostly double-digit monthly gains. Buckle came in with just a 2.8% increase, after 22 months of double-digit gains.

Department stores also struggled last month. J.C. Penney (JCP) and Target Corp. (TGT), which are aggressively marketing back-to-school clothing and dorm furnishings, posted 12.3% and 6.5% declines, respectively. Macy's Inc. (M) said its sales dropped 10.7%.

One retailer benefiting from tough economic times is TJX Cos. (TJX), the parent of T.J. Maxx, Marshalls and other chains. The company, which sells discounted brand-name merchandise, is picking up customers that in previous times frequented department stores. The company's same-store sales rose 4%, beating analysts' consensus expectations of a 2.3% rise.

Office supply stores are also banking heavily on back-to-school sales. Staples Inc. (SPLS) recently said its second quarter profit fell 38% with the recession and rising job losses continuing to dent demand for higher ticket business machines, furniture and other durable items. Back-to-school sales, the company's biggest selling period, aren't expected to be as robust this year in light of the economy, but sales have so far been on plan and off to a good start.

Chief Financial Officer John Mahoney said, "We are seeing customers coming in to buy only things they need. Sales won't be as robust as they've been some other years. We've been prepared for it."

Like its smaller rivals Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), Staples wasn't immune to the economic downturn that led customers to reduce average order size and postpone their nonessential and pricier purchases. Still, some analysts said the company is faring better than its smaller competitors and is poised to gain share.

For a hedged trade in the retail sector, consider the October 20/18 Bull Put spread for a 25 cent credit. That's a 14.3% return, and the stock has to fall 8.8% to cause a problem.

With deep cost savings policies already in effect, back-to-school sales will be the principle driver of retail profits in the coming months. Whether clothes, books, paper or bigger items like computers and printers, many retailers need a big back-to-school season to keep in business long enough to see a fall recovery. The end-of-year holidays are usually seen as the savior of most retail years. This year, it could be a big victory to still be open for the holiday season.

f you have any additional thoughts, ideas or back-to-school stories, please e-mail me at vwisemann@InvestorsObserver.com.