Backpacks, Stanley water bottles and No. 2 pencils. This year’s back-to-school must-haves are a mix of new and (very) old. But the most important thing shoppers are looking for doesn’t appear on any lists: good deals. The stores that can offer the best deals will win the season. The back-to-school shopping season — a key period for retailers that typically kicks off properly in July and runs through early September — comes at a sensitive time. Inflation, while declining from multi-decade highs, has taken a toll on consumers, particularly those in lower income brackets. Most shoppers are increasingly picky about where and how they spend their money. Credit card debt is rising and the job market has softened. Against that backdrop, some on Wall Street expect moderate spending as families prepare for their kids to go back to school. For example, retail-focused Telsey Advisory Group expects “modest growth and general consumer caution from a macro perspective,” according to a recent note to clients. But that environment plays into the hands of some retailers. In fact, Telsey Advisory argued that discounters and e-retailers — such as club holdings TJX Companies and Amazon — “are poised to gain market share during the back-to-school shopping season by offering discounted school supplies and non-discounted products.” “In what has been a disappointing back-to-school season for many, as consumers scale back spending, a company like TJX should fare better,” said Jeff Marks, director of portfolio analysis. “Its stores have increasingly become a go-to place for people to shop because of their focus on quality and value.” TJX is one of “the best retailers you can own here,” Jim Cramer added during the club’s monthly August meeting on Wednesday. Electronics and sporting goods retailers have mixed prospects, according to Telsey Advisory. But one “bright spot” for this group of companies known as hardliners is likely to be laptop purchases, in part due to AI innovations. For that reason, club holding Best Buy, which carries an exclusive line of AI laptops, may be relatively well positioned. “Best Buy is a harder read because the new AI laptops are expensive,” Marks acknowledged, “but longer term it should benefit from many having to replace their pandemic-era models.” The July retail sales report released Thursday morning painted an encouraging picture for TJX, Amazon and Best Buy. While clothing and clothing accessories stores posted a 0.1% month-on-month decline, department stores posted a 0.2% decline – a group that has ceded market share to off-price companies like TJX. Meanwhile, sales at brick-and-mortar retail, which includes e-commerce companies like Amazon, rose 0.2%. Electronics and appliance stores, which include Best Buy, were up 1.6%. Back-to-school and college shopping is one of the biggest retail periods of the year and offers important insights into the health of consumers and retailers. So far this earnings season, many companies have reported a decline in consumer spending, underscoring the current mixed picture for retail. Home goods retailer Wayfair, for example, touted “challenged consumers in a difficult macroeconomic environment” in its second-quarter results, which came in below Wall Street estimates on Aug. 1. Notably, CFO Kate Gulliver said Wayfair is seeing a “pronounced performance spread between promotional and non-promotional days,” a sign that shoppers are looking for bargains. The National Retail Federation is forecasting a decline in back-to-school spending in 2024. In its Back to School and Back to College survey released last month, the NRF estimated that consumers will spend $39 billion on back-to-school purchases in 2024, down 6.5% from $41.5 billion a year ago. At the college-back level, spending is expected to decline 7.4% to $86.6 billion, compared to $94 billion in 2023. Despite the year-over-year declines, the survey is forecasting the second-highest spending on back-to-school and college items in its history. TJX YTD Mountain TJX Companies’ year-to-date stock performance The hunt for value and discounts will be especially pronounced among middle- to low-income consumers, who are expected to switch to cheaper options, according to Dana Telsey, founder of the eponymous equity research firm that covers a broad range of companies in the retail sector. This is where off-price retailer TJX shines. Its ability to appeal to bargain-hungry shoppers has been on display since we acquired a stake two years ago for about $64 a share. The stock, currently trading at about $111, is up about 19% through 2024 — significantly more than the consumer discretionary sector of the S&P 500, which is up about 3% year-to-date. “When you think about (TJX’s) pricing strategy, they’ve been very competitive,” Telsey said in an interview. She added that TJX’s assortment of different brands, which in some cases are more than 50% off compared to traditional retailers, “adds to the excitement” of back-to-school shopping at its stores. TJX should also be a big beneficiary of back-to-school shopping, as it has “one of the largest presences in the home (and) dorm decor space,” Telsey added. The company not only carries some of those goods at Marshalls and TJ Maxx, but also operates HomeGoods. In a note to clients last week, analysts at TD Cowen said they expect TJX to gain market share during this crucial summer shopping season, citing industry research that showed weaker back-to-school shopping trends at mall-based department stores and retailers. The analysts raised their second-quarter estimates for comparable stores such as TJ Maxx and Marshalls to 4% from 3% and earnings per share to 96 cents from 93 cents. The company will report its May-July results next week. Another company that could gain market share in back-to-school shopping is Amazon. Back-to-school shoppers are more likely to shop around retail sales events such as Amazon’s Prime Day, which this year was on July 16 and 17, analysts at Telsey Advisory wrote in their latest note. The e-commerce giant posted record sales of $14.2 billion during the 48-hour event, which offered deep discounts on a wide selection of products. AMZN YTD Mountain Amazon’s stock performance year-to-date. According to the NRF survey, 68% said they planned to shop for back-to-school and college deals during Amazon’s Prime Day, the highest in the past five years. “Amazon has created a shopping guide for customers to purchase items — including dorm room aesthetics, trendy decor, as well as technology items like clothing, backpacks and books — to make shopping easier,” wrote analysts at Telsey Advisory. Amazon’s fast order fulfillment is an added convenience bonus that shoppers consider when making their purchasing decisions, the company said. The apparent success of Prime Day, however, couldn’t prevent Amazon’s third-quarter revenue forecast from disappointing Wall Street earlier this month. The weaker consumer spending environment is undoubtedly a concern for the company in the coming months, but its guidance may well have been intentionally conservative given the tough economic climate. It certainly hasn’t changed our overall outlook for the company. In fact, we added to our position on Monday. BBY YTD Berg Best Buy’s year-to-date stock performance. Best Buy’s opportunity to capitalize on the back-to-school season is smaller than TJX and Amazon’s, but it’s still there. And that’s largely because of laptops. “Computers are a bright spot in electronics and should remain popular for back-to-school as innovations come from AI-enabled laptops,” Telsey Advisory analysts wrote. That’s in line with our thesis on Best Buy, which should benefit from consumers’ need to replace electronics they bought at the start of the Covid-19 pandemic. This time, they have the option to buy AI-powered PCs, some of which are only available at Best Buy. About 40% of Microsoft’s roughly 40-item line of AI PC products are exclusive to Best Buy, the retailer said. At Best Buy’s earnings call in late May, executives noted that the launch of the AI PCs coincided with the back-to-school season and the company’s marketing refresh. “We’ll be using some of these new brandings as we get ready for back-to-school,” CEO Corie Barry said at the time. Although the electronics portion of July’s retail sales report was encouraging, the AI PC thesis doesn’t relate to a single quarter or customer demographic, such as a freshman in college who needs a new machine for college. It’s a theme that spans multiple quarters and boosts Best Buy’s finances and stock price over time. (Jim Cramer’s Charitable Trust is long TJX, AMZN, BBY. A full list of stocks can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim will wait 45 minutes after a trade alert is sent before buying or selling a stock in his charitable trust’s portfolio. 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Customers shop for school supplies at a Target store in Colma, California.
David Paul Morris | Bloomberg |
Backpacks, Stanley water bottles and No. 2 pencils. This year’s back-to-school must-haves are a mix of new and (very) old. But the most important thing shoppers are looking for doesn’t appear on any list: good deals. The stores that can deliver the best deals will win the season.
