There’s unlikely to be a breakout in back-to-school business when stores report July comparable-store sales on Thursday.
Preliminary reports indicate that consumers, content in June to leave their b-t-s shopping for later in the summer, kept procrastinating last month. Evidence is growing that they might need more promotional coaxing to open up their wallets, which could hurt third-quarter margins.
“July, with scorching weather and decent traffic trends, should have ensured a solid start to the back-to-school season,” said Brean Murray, Carret & Co. analyst Eric Beder. “Instead, high inventory levels from key players, continued weak economic trends and the consumer shopping later in the season have combined to create what will probably be one of the most aggressive discounting seasons in recent memory, as there are already material price cuts on key categories such as denim and Ts.”
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Beder said results, particularly in the teen market, were not expected to improve through the b-t-s season, leaving retailers such as American Eagle Outfitters Inc., Abercrombie & Fitch Co. and The Wet Seal Inc. with a glut of inventory or an “unappealing” pricing model.
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Mike Berry, director of industry research for MasterCard Advisors SpendingPulse, was slightly more upbeat. Although apparel sales slipped 1.1 percent on a year-over-year basis in July, according to MasterCard data, sales at family retailers, a category that includes teen retailers, edged up 3.4 percent. SpendingPulse estimates total U.S. retail sales made by cash, check or credit card.
Wary because of the rough-and-tumble action on Wall Street, luxury consumers cut spending last month, driving down jewelry sales 1.2 percent, including a 13 percent dive in high-end jewelry. Excluding jewelry, overall luxury spending was down 0.2 percent, according to Berry.
Berry said, “Until consumers see encouraging news over a substantial period of time, they will continue to be skittish.”
Berry said b-t-s might get a boost when teens get a better idea of what their peers are wearing or start to respond to cooler weather.
Until then, mall trends suggest a softening in July, partly because of “lingering hot weather,” said Michael Niemira, chief economist and director of research for the International Council of Shopping Centers. “For the fiscal month of July, sales are likely to increase between 3 and 4 percent with an increased unevenness across the industry.”
“Counting cars at the mall parking lot would not be a good proxy for retailer health this month, in our opinion,” RBC Capital Markets analyst Howard Tubin wrote in a research note, adding that “relatively strong mall traffic” didn’t necessarily translate into sales in July.
Tubin, who did not predict a “great” showing on Thursday, forecast that business will improve in August and September, but he conceded that it will be a “promotional back-to-school season.”
Retailers such as Aéropostale Inc. and Limited Brands Inc.’s Victoria’s Secret are “likely to remain standouts” because of their fresh apparel lines and dynamic value propositions, Tubin said.
In the meantime, it will likely be tough going for retailers in coming months.
“Beginning in August, retailers will face challenging [year-over-year comparisons], which is increasingly concerning given rising inventories, expenses and sourcing costs,” said Weeden & Co. analyst Amy Noblin.
Expect a bumpy road as retailers “guide more conservatively for the second half,” and stocks continue to react to anything deemed to be “bad news,” she added.