WWD.com/beauty-industry-news/financial/bts-questions-cloud-q3-outlook-1701145/
government-trade
government-trade

Back-to-School Poses Stiff 3rd-Qtr. Challenge

Shoppers are out earlier, but the quest is for bargains.

Targeting teens has helped Buckle weather the economic storm.

Teen retailers appear poised to report fairly strong second-quarter results this month, but the outlook for the back-to-school season and the third quarter remains far more complicated.

While parents are expected to demonstrate their historic tendency to put off purchases for themselves in favor of their kids during times of economic stress, the b-t-s season ahead, plagued by record-setting prices for gas and commodities and high levels of home foreclosures, may provide the greatest test in years of teen fashion resiliency.

Physical growth and changing fashion trends may require at least a slight realignment of kids’ wardrobes, but the signs suggest spending will be tied to promotions and discounts, many of them already available, and shopping trips fewer and more pressure-packed.

Even before economic prospects worsened this summer, there were signs of teen resistance. In April, Piper Jaffray reported that spring fashion spending this year represented 41 percent of the total teen budget, down from 44 percent during spring 2007, prompting Piper Jaffray senior analyst Jeffrey Klinefelter to call this period a “discretionary recession.”

“I think teen shopping behavior and spending trends have been more consistent historically than adult spending behavior in shopping trends in discretionary products like fashion,” Klinefelter said, declining to venture a guess about what could transpire in the third quarter.

Marshal Cohen, chief industry analyst at The NPD Group, expects the season to play into the hands of more moderately priced retail outlets. “There’s definitely a trading-down factor,” he said of teens. “They are shopping more at less-expensive stores, but they still are going out and getting a power outfit or two with some of the expensive ones at the same time.

“There is going to be more spent at the lower end of the market, and a little bit still spent at the upper end,” he concluded, noting that could mean a continuation of strong numbers from Buckle Inc., the higher-end specialty store that saw its June same-store sales soar 28.9 percent despite emphasis on branded denim between $70 and $120.

The trading-down theory is supported by a survey of more than 5,000 consumers conducted last month by Deloitte LLC. Asked how their b-t-s shopping would be different this year than last, 79 percent said they’d buy more items on sale, 70 percent said they’d buy only what the family needs and 68 percent said they’d buy more lower-priced items. Forty-six percent indicated they’d shop at different, less-expensive stores.

“These survey results indicate that consumers will likely stick to the basics this fall, and parents may be saying ‘no’ more often as they head to the register,” said Stacy Janiak, U.S. retail leader at Deloitte.

With stimulus checks in hand and promotions happening earlier, a Citigroup survey found that 52 percent of shoppers had at least started their b-t-s shopping by late July this year, as opposed to 33 percent last year and just 26 percent in 2006.

“Back-to-school shopping for 2008 is off to an earlier start than [in] 2007 and 2006,” wrote Citigroup broadlines analyst Deborah Weinswig, adding the Citigroup survey found that 75 percent of respondents will spend under $400 on b-t-s purchases, far higher than the 45 percent who had established that ceiling last year.

The reasons? Aggressive promotions by retailers, bargain hunting by shoppers and “spending pulled forward as a receipt of tax rebate checks in the April-through-June time frame.”

The National Retail Federation’s annual survey found that b-t-s apparel purchases would increase slightly to $234.51 per family from $231.80 last year. However, back-to-college apparel purchases are expected to fall to $134.40 per student from $149.85.

Teen spending held up well through May, according to an NPD study of 3 million 13- to 17-year-olds. Teen spending on apparel rose 2.5 percent, to $27 billion from $26.34 billion, in the 12 months ended in May versus the preceding 12 months. In February and March, the increase was 8.9 percent.

Overall spending on apparel dropped 3 percent during the 12-month period. “In a downtrending market, the teen market is growing,” NPD’s Cohen noted.

With bargain-conscious shoppers out earlier, second-quarter results were generally viewed as having benefited from the receipt of stimulus checks, an effect likely to be far less pronounced in the third quarter. Still, surveying a group of nine specialty retailers with large teen or young adult constituencies, only two — American Eagle Outfitters Inc. and Pacific Sunwear of California Inc. — are expected to have lower Q2 earnings than they did in the comparable period last year. Hot Topic Inc. is expected to have an identical loss of 3 cents a share, and six others — Abercrombie & Fitch Co., Aéropostale Inc., Buckle, Gap Inc., Urban Outfitters Inc. and The Wet Seal Inc. — are expected to post better results.

“The reality is that the economy is in pretty bad shape now and all retailers are experiencing a pinch,” said Forrester Research retail analyst Sucharita Mulpuru. “If you can even have flat comps with zero growth, you’re in good shape.”

Global Insight chief U.S. economist Brian Bethune said, “Consumer spending is going to discounters and to gasoline.”

ShopperTrak RCT said it anticipated retail sales to rise 2.6 percent over the third quarter 2007, driven by b-t-s shopping, but forecast that total foot traffic will decrease 2.5 percent for the same period.

That coincides with the view of Roth Capital Partners analyst Liz Pierce, who said that while shoppers may be less impulsive, they are spending more when they do go shopping. She also said that some families would turn to Internet shopping as a way to get around climbing gas prices.

“My outlook is that we will have a short-lived back-to-school season. It won’t be as powerful in seasons past,” she said. “I’m more concerned about the holidays because there are more items that tend to cannibalize apparel sales for holiday than necessarily for back-to-school.”

Other factors could affect the second half of the year as well. Even after a slight relaxation in late July, gas prices remain painfully above those of a year ago.

Forrester’s Mulpuru said the current high unemployment rate among teens will probably curb their spending going into b-t-s. Unemployment among those ages 16 to 19 fell to 18.1 percent in June from 18.7 percent in May, but jumped to 20.3 percent in July, the Bureau of Labor Statistic reported on Friday. Overall unemployment rose to 5.7 percent last month from 5.5 percent in June.