Retail Investors Bracing for Back-to-School Blues

NEW YORK ( TheStreet) -- Remember how back-to-school time used to be such a bummer, rife with disappointment and a sense of lost opportunity? Well, the sorrow may not just be for kids, anymore.

Indeed, the crucial back-to-school season -- typically second in importance for the retail sector only to Christmas -- often provides a vital lift for the second half of the year. But the signs this year point to a season that might garner a failing grade.

We begin with consumer confidence -- or the lack thereof -- which in July hit its lowest level since April. Likewise, several shopper surveys indicate that not only will consumers spend less overall than last year, but apparel in particular, will experience substantial decreases.
Retailers prepare for failing marks this back-to-school season.

Families with students in grades kindergarten through 12 are expected to dole out $548.72 on school merchandise, down 7.7% from last year, according to the National Retail Federation.

And these numbers look even worse when it comes to apparel, as NRF predicts a 12.7% slump In the category, the biggest decrease in five years.

Even when consumers are bombarded with bargains -- once a sure-fire way to get them to spend -- they just aren't budging. "According to our research, 70% are spending between 10% and 30% less, even when presented with good deals," UBS analyst Roxanne Meyer said.

As a result, specialty retailers are poised to get hit the hardest. Abercrombie & Fitch ( ANF) and Pacific Sunwear of California ( PSUN), both of which have been reporting double-digit declines in monthly same-store sales, are not expected to recover in the near-term.

"Abercrombie & Fitch has done a good job recently of injecting fashion into its stores," Needham & Co. analyst Christine Chen said. "But it will take about another quarter or so to see any sort of improvement,"

Likewise, American Eagle Outfitters ( AEO), while not as hard pressed as its competitors, faces middle-child syndrome. The teen retailer is squashed between Aeropostale ( ARO) and Abercrombie as it struggles to figure out who it wants to be and who is its target demographic.

"American Eagle's product is not as good as Aeropostale's or Abercrombie's and it can't compete on price with Aeropostale," Chen said.

Indeed, it's quite possible that Aeropostale will be one of the only back-to-school success stories in the space. "Aeropostale will continue to take share, not because it has the lowest prices, but because the fashion actually looks really good," Chen said.

It's no secret that Aeopostale ranks best in class, as one of the only apparel retailers to post consecutive monthly same-store sales gains amid the recession. Sales will be helped by some new fashion trends, especially the growing popularity of distressed and destroyed denim.

But apparel is hardly the only category that shoppers are poised to skip this back-to-school season. Paper, pencils and notebooks are also getting short-changed, with 39% paring down on supplies, according to a Deloitte survey. In fact, a mere 29% of respondents cited office-supply stores as their go-to destination, meaning Staples ( SPLS), OfficeMax ( OMX) and Office Depot ( ODP) could be in for a failing school-year.

Amid this rather dismal selling picture, there might, however, be one merchandise bright spot: electronics. With personal laptop and desktop computers becoming all-the-more affordable, spending on electronics and computer equipment is expected to increase 11%, according to NRF.

The jury is still out on whether these shoppers will flock to consumer electronic stores like Best Buy ( BBY) and Apple ( AAPL), or rather to discounters like Wal-Mart Stores ( WMT) and Costco Wholesale ( COST) for their gadgets.

But even if consumers don't head to discounters for electronics, you can bet they are going there for everything else. According to the Deloitte survey, about 90% of shoppers said they would do a bulk of their buying at discounters and value department stores, while 40% said they will go to dollar stores.

This bodes well for Wal-Mart, Costco and Target ( TGT), as well as 99 Cents Only Stores ( NDN).

But the dark horse of back-to-school could be drug stores, which are no longer just cold-and-flu season destinations.

According to NRF, nearly a quarter of families plan to shop at drugstores like CVS ( CVS), Walgreen ( WAG) and Rite Aid ( RAD), as their merchandise mix has broadened beyond health and beauty products to include school supplies, small electronics and even groceries.

Rite Aid even announced on Tuesday its back-to-school savings program, and is emphasizing the value of its private-label brands. "In times like these, we know families are going to be watching their monthly budgets," Greg Axtam, category manager for home, office and school supplies, said in a statement. "We're doing everything we can to offer them many reasons to come check us out each and every week."

Now if only all the other retailers could find a way to do that, too.
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