Back-To-School Retail Winners And Losers

Includes: AEO, ANF, GPS, TGT
by: Greg Group

As we enter the back-to-school shopping season, the challenging economy is playing a role in the winners and losers of retail stores. For July, consumer confidence picked up after four straight months of declines. Several back-to-school surveys have forecast a pickup in spending. For instance, a National Retail Federation poll showed average spending is likely to rise at its fastest pace in at least 10 years.

After several years of uncertainty it seems the economy is still impacting how Americans shop. Consumers are still looking for bargain prices to stretch their dollars as far as possible. This year more families say they will shop at department stores and online for school items as they look to get the best bang for their buck. Discount stores will be the most popular shopping destination, however, with 67.1 percent planning to shop there for school items according to the NRF poll.

For bigger chains, Target (NYSE:TGT) is looking like a big winner. Consumers continue to respond to the innovative merchandising, remodeled store program and 5% discount cards at Target resulting in healthy increases in traffic and sales in a consumer environment that remains quite challenging. Target reported that its July sales at stores open at least one year rose 3.1%. Analysts, on average, had expected same-store sales to rise 2.7%, according to Thomson Reuters. Net sales for the four weeks ended July 28 rose 3.2% to $4.99 billion. Shares of Target are trading near 52-week highs with a dividend yield of 2.29%. Target has an equity summary score of 8.8 out of 10 for a Bullish outlook.

Kohl's (NYSE:KSS) and rival J.C. Penney Co. (NYSE:JCP) are mid-priced retailers that have been squeezed as shoppers shifted their spending on the low end to chains. Kohl's reported a smaller-than-expected decline in second-quarter profit, helped by expense control and new items such as Jennifer Lopez clothing. But the department-store operator cut its full-year outlook on expectations it might have to continue to cut prices to generate demand. JC Penney has lost the coupon mom as it botched its change in pricing strategy. Penney looks to be the biggest loser for back to school and the holiday shopping season, which is only 90 days away. Investors should avoid both stocks in the short term.

For discounters, TJX and Ross Stores are looking like the winners. For both TJX Cos (TJX) and Ross Stores Inc. (ROST), which have thrived through a model of selling discounted designer and other brand-name goods, July sales were up a better-than-expected 7%. They both raised their second-quarter outlooks. Consumers are still looking for bargains on brand products that can be purchased at these stores in this economy. TJX and Ross Stores are both great companies for this economy. Analysts agree by giving TJX a VERY Bullish 9.9 out of 10 on its equity summary score. Ross Stores has an equity summary score of 9.2 out of 10.

For teen shoppers, Gap (NYSE:GPS) and American Eagle Outfitters (NYSE:AEO) look to be the winners as Abercrombie & Fitch (NYSE:ANF) and Aeropostale (OTCQB:AERO) are trailing the pack. Gap North America July sales surged 13%, beating the 6.4% estimate and marked the sixth straight monthly increase. Its other divisions also posted positive surprises. The company forecast second-quarter profit of 47 cents to 48 cents a share, beating the 38-cent average estimate. Gap's global marketing campaign for fall features an eclectic mix of musicians and dancers wearing Gap's signature pieces updated with a modern design point of view and rich fall color palette. This should appeal to the teen audience in time for back-to-school shopping season. Gap has an equity summary score of 8.2 out of 10 for a bullish outlook.

American Eagle Outfitters Inc. raised its forecast after second-quarter sales rose a better-than-expected 9%. The company raised its guidance for the second quarter by six cents to a range of 19 cents to 21 cents a share. It said net sales for the second quarter increased 11% to $740 million, with same-store sales including comparable-store sales increased 9%, including sales from its online stores. American Eagle has an equity summary score of 9.3 out of 10 for a VERY Bullish outlook.

Shares of teen apparel retailers Aeropostale Inc (NYSE:ARO) and Abercrombie & Fitch Co (ANF) fell sharply on weak earnings forecasts, as their relatively high-priced merchandise failed to strike a chord with shoppers looking for cheaper options. Both companies have been changing merchandise assortments and tweaking inventory levels to better appeal to customers drawn to the fast-fashion retailers that are able to more quickly keep up with the latest fashion trends. The retailers have also been forced to discount as consumers prioritize spending on discretionary items in a weak economy. Investors should avoid both stocks based on the back-to-school season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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