Slump Won't Dent Back-to-School Sales

Despite housing and credit worries, retailers should see growth this season.
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SAN FRANCISCO -- As back-to-school season enters full swing, housing and credit worries likely aren't keeping shoppers at bay.

Consumers -- particularly those in college -- are still expected to pull out their wallets this season. According to the National Retail Federation, back-to-school spending on kids from kindergarten to high school is expected to climb 4.4% this season to $18.4 billion.

Back-to-college spending, representing shoppers over 18 in college or post-graduate programs, is projected to surge 29% year over year to $47.3 billion.

Marie Driscoll, a retail analyst for Standard & Poor's, says back-to-college spending will likely benefit from a projected 1.9% increase in college enrollment this year. Moreover, retailers have made a stronger effort in recent years to reach out to college shoppers, who are more likely to spend money on high-priced items such as iPods, laptops and dorm and apartment furnishings.

Overall, retailers are looking to come back from what has been a sluggish summer for sales. Many chain stores -- including big names in the teen sector such as

Abercrombie & Fitch

(ANF) - Get Report

and

American Eagle

(AEO) - Get Report

-- reported soft sales for July.

The weakness was partly blamed on a late start in the school season in Texas and Florida, as well as a timing shift in a tax-free sales week in several states.

Industry observers also noted that shoppers are growing more unwilling to make their back-to-school purchases so early in the summer, preferring instead to wait until August and September. Investors will get an idea of how much weight this theory holds on Thursday, when most chain stores report their August sales figures.

Driscoll believes that the housing slump, which companies such as

Wal-Mart

(WMT) - Get Report

have blamed for recent woes, shouldn't have an impact on back-to-school sales. She says the back-to-school period marks a transition from discretionary spending to necessary spending.

"When the product is right, they're willing to shop," Driscoll says of consumers. "There's fear in the investing public, but I'm not so sure of the consuming public yet."

Several retailers say they have noticed a pickup in sales since July, which they expect to boost their numbers in the current quarter.

"We're now in the midst of the back-to-school season and are pleased with the customer response to our collection," said Susan McGalla, president and chief merchandising officer at American Eagle, in a recent conference call. "Our Fall One assortment arrived in stores on Aug. 28. This updated fall collection will capitalize on later back-to-school markets and the Labor Day holiday traffic."

Both

Target

(TGT) - Get Report

and

Kohl's

(KSS) - Get Report

have also reported improvements in back-to-school sales as customers shop deeper into the season.

"After a strong start to the quarter in May, our sales performance was affected by the performance of our seasonal businesses in June and July," said Kohl's CEO Larry Montgomery in a recent statement. "Strength in our other businesses remained consistent and our early read on back-to-school is positive."

Wal-Mart, which earlier this summer slashed prices on 16,000 items in its stores at the cost of its margins, still sees promise in back-to-school shopping. During the company's second quarter earnings call, Eduardo Castro-Wright, CEO of the discount chain's U.S. stores, said he has been encouraged by August sales and noted that customers are buying items closer to when they need them.

Abercrombie & Fitch, which posted a 4% drop in July same-store sales, declined to discuss its read on the back-to-school season during its second-quarter earnings call.

Analyst Christine Chen of Needham & Co. expects same-store sales for the company to increase 1% in the third quarter vs. 5% last year. She characterized her prediction as conservative because of a back-to-school calendar shift out of July (the second quarter) and into August, which could give the third quarter a lift.

Overall, although apparel and accessories still make up the largest category of back-to-school sales -- an estimated $7.6 billion -- the NRF expects them to be flat compared with last year.

The NRF predicts that the biggest back-to-school sales drivers this year will be electronics, including items such as laptops, cell phones and iPods, as the higher demand from college students help boost results. Footwear and school supplies should also see a big surge, the trade group said.

Driscoll says

Best Buy

(BBY) - Get Report

will likely benefit from electronics purchases during the season. She also expects strong sales from

J.C. Penney

(JCP) - Get Report

, although most of the shopping will likely be done by mothers for their children.

Meanwhile, the usual beneficiaries of back-to-school shopping that have been hit by the housing slump, such as

Staples

(SPLS)

and

Bed Bath & Beyond

(BBBY) - Get Report

, will be looking for a much-needed lift during the season.

But although retailers lean heavily on the back-to-school season, the end-of-the-year holidays still outrank it in terms of sales.

"We do not view it as critical to the success of the year, as investors typically become more interested in retail stocks leading up to the holiday season," Driscoll says. "We think this explains the relatively lackluster performance of retail stocks in July and August."