Back-to-school delays, virtual classes could deepen pain for some retailers, and be windfall for others

Business

This school year, retailers may have only one certainty to count on: Kids are growing and that’ll drive some demand for new clothes. 

Otherwise, retailers and industry watchers are unsure of what to expect as the pandemic delays the first day of school, leads to staggered schedules or prompts plans for virtual learning across the U.S. Some analysts predict that families will spend less as they watch their budgets or as home-schooling limits the need for a fresh wardrobe. Others say it will simply shake up the shopping list, adding more big-ticket items like laptops and tablets and shifting spending toward lower-priced casual wear like T-shirts and leggings instead of outfits intended to impress.

Even retailers themselves have signaled they don’t know what’s ahead, said Joe Schmitt, managing director in the retail practice at AlixPartners. He said the few ads that retailers have run have struck a different tone this year.

“Everyone is a little gun shy in terms of what they want to put out there and what the message to the customer should be,” he said. “I don’t think we can have our typical kids playing in the park, greeting each other after a ‘long summer away type’ message that we’ve seen in past years.”

The spread of Covid-19 has repeatedly hit the bottom line of many retailers. Fear of an outbreak forced many to shut down for two to three months during stay-at-home orders. With a sharp drop in sales, some had to draw down credit, slash salaries, lay off or furlough employees — or file for bankruptcy. Now, the pandemic will disrupt a crucial sales season.

The back-to-school season — the second largest driver for many retailers after the holidays — could deepen the pain, especially for shopping mall staples with a heavy emphasis on kids’ and teens’ clothing, Bank of America analyst Lorraine Hutchinson said in research note. 

Gap, American Eagle Outfitters, Abercrombie & Fitch, Urban Outfitters and The Children’s Place will see weaker-than-usual sales in late July through early September, she said, as families delay or cut back on clothing purchases.

Many of those companies recently reopened stores and have spoken of growing demand as customers return. She said the back-to-school season could change the narrative because sales could weaken. She said that would be “frustrating and disappointing for investors who had been counting on a steady march” back to sales in line with last year. 

That could hurt stock prices once again. Take Gap shares. The stock, which has a market value of $5.3 billion, hit a 52-week low of $5.26 in early April. But shares closed Wednesday at $14.15. Similarly, American Eagle shares have bounced back from a low of $6.54 in late April, to close Wednesday at $10.65. This recovery has trimmed American Eagle’s losses to a drop of about 27% year to date, which puts its market value at $1.8 billion. 

If demand for apparel is weak heading into the fall, American Eagle, Abercrombie & Fitch and The Children’s Place will especially take a hit, Hutchinson said. The third quarter makes up about 30% of their annual earnings because back-to-school is such a powerful sales driver.

For each of the past nine years, The Children’s Place has reported higher earnings per share in the third quarter, which includes back-to-school, than in the fourth quarter, which includes holiday shopping. American Eagle and Urban Outfitters earned more in the third quarter than the fourth quarter last year.

Analysts for Bank of America already predicted negative sales trends in the third quarter for those three retailers. On average, they expected same-store sales for the quarter to fall by about 10%. Now, with headwinds during the back-to-school season, they predict same-store sales will drop by an additional 3% to 4%.

Retailers may have a smaller pool of customers this year because many kids live in hard-hit states. Arizona and California, for example, represent 14% of the U.S. school age population between ages 3 to 17, according to Bank of America. In other large states, such as Texas, Covid-19 cases continue to rise and create more uncertainty for families.

However, Hutchinson added, remote learning could lead to purchases, too, such as art supplies, tablets and hand soap.

AlixPartners’ Schmitt said big-box retailers and club stores that carry school supplies, lower-price clothes, laptops and headphones, could pick up more wallet share.

The National Retail Association said the different mix could be good news. In an annual back-to-school survey, it projected that back-to-school spending could hit a record this year as parents buy pricey technology to prep for online classes. Parents of kids in elementary through high school said they planned to spend an average of $789.49 per family, higher than the previous record of $696.70.

Economic trends add unpredictability that could help or hurt, too. Many Americans remain furloughed or unemployed, which could rein in discretionary spending.

However, Schmitt said stimulus checks could put money in their pockets. In Washington, Republicans and Democrats have expressed support for a new round of up to $1,200 in stimulus payments to millions of Americans.

That could turn into another bump for Walmart, Target, Best Buy and other retailers that said they got a bounce in April from a first round of checks — but this time rather than TVs, toys and sporting goods, the emphasis will be on school supplies.

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