What's in fashion for back-to-school shoppers? Mostly the same styles as last year — clunky shoes, peasant shirts, jeans that look older than the kids buying them. But at least one thing in the nation's malls and shopping centers this summer wasn't there a year ago.
Optimism.
There are signs, faint but growing, that American consumers are ready to spend again during this crucial back-to-school season — and could give retailers something they haven't seen for a while: a strong fourth quarter. “With consumers heading back to the stores for everything from scissors to sneakers, retailers are hopeful that the back-to-school season will signal the beginning of an economic recovery,” says National Retail Federation President and CEO Tracy Mullin. NRF expects $14 billion in seasonal sales.
Mall owners and even long-suffering retail executives are feeling more upbeat, not just a good sign for back to school, but a harbinger for months to come. Analysts at UBS, for example, predict a 6 percent to 6.5 percent rise in holiday sales this year, compared with an 11 percent decline last year.
“We're about to hit the sweet spot,” says Carl Steidtmann, chief economist at Deloitte Touche, on a recent conference call “I'm very optimistic that this will be the best holiday season of the millennium.”
The optimism is shared by mall owners. At Simon Property Group, the nation's biggest owner, Michael McCarty, president of Community Centers Division, agrees that back-to-school is “an early warning sign” for the holidays, and so far he hasn't seen any cause for alarm. Indeed, he says, mall traffic is trending upward and average expenditures are rising.
Shoppers seem encouraged by a perception that the economy is heading (albeit slowly) back to normal. Much of the uncertainty over war in Iraq has passed and companies are beginning to report healthier earnings. And, even though unemployment remains high, the stock market's renewed ability to go somewhere other than down points to stronger earnings — and maybe even hiring.
“The economy is not robust, but it's more stable than it was, and that tells me that back-to-school will be better than it was last year,” says Wesley Wright, a founding partner of Diversified Retail Solutions, a retail consulting firm based in Bentonville, Ark. “I would expect it to be much more solid.”
That wouldn't take much. The 2002 back-to-school season flunked, having failed to live up to even the mediocre expectations that had been set for it. Department stores and specialty retailers had an especially rough go of it. Same-store sales at Federated Department Stores fell 5.8 percent last August, for example, while those at Gap Inc. dropped 2 percent. At Sears, the August drop was even more precipitous, with same-store sales down 11 percent, in part because of double-digit drops in apparel sales.
Back-to-school is retail's second most important season, right behind the year-end holidays. The nation's school year starts at widely differing times — from early August in parts of Florida, for instance, to the second week of September in New York City — and the shopping season is equally broad, beginning in late July and extending to the end of September.
As everyone knows by now, last year's weak late-summer numbers set the pattern for the rest of the year. The cheerless holiday season was marked by slow store traffic, heavy promotions and weak earnings for retailers.
So, good news in August could point to happy holidays ahead. “Back-to-school is a very, very good indicator of the holidays,” says Marshall Cohen, senior industry analyst with The NPD Group, a market information company. “The economy doesn't change that fast in today's society, and I believe it's going to be a clear indicator of what's going to come.”
Cohen is confident that back-to-school will be strong. “It looks like the consumer is starting to traffic the mall more,” he says. “This was a repressed spring, but summer's finally here. That psyche puts people in the spending and buying mode. This same time last year, the malls were very quiet.”
Recent statistics certainly point in that direction. Consumer spending rose slightly in April and May, and the University of Michigan's June Consumer Sentiment Index, while down from the post-war levels of May, nevertheless showed a growing inclination to spend.
In May, an NPD survey found that 14 percent of consumers planned to spend more than usual on apparel during the next three months, up from 11 percent in a survey before the Iraq war.
The optimism about spending is being echoed in retailers' front offices. The Retail Sector Performance Index, compiled each month by the National Retail Federation and the Bank of Tokyo Mitsubishi, reached its highest level in June since the survey began almost a year ago. The index measures the current assessment of industry executives on metrics such as sales volume, traffic, average transactions, employment and inventories, and polls them on their sales outlook for the next six months. Another part of the survey — the Demand Outlook Index, a six-month sales outlook — also rose to its highest level ever.
The NRF itself is forecasting a substantial jump in general merchandise, apparel and furniture sales in the second half — a gain of 4.5 percent, up from 2.2 percent in the first half. Projected increases of 4.3 percent in the third quarter and 4.7 percent in the fourth would bring the year's gain to 3.5 percent, the federation says. NRF Chief Economist Rosalind Wells says the improvement will be driven in part by “pent-up demand for apparel, provided weather and styles cooperate.”
The optimism over back-to-school sales may stem in part from the industry's efforts to put its house in order. Analysts say retailers are in a better place than they were a year ago, with inventories under control and a bigger emphasis on current merchandise, both of which should help them resist the rush to promote. “Last year retailers panicked very early,” says Cohen. “Jeans and footwear were really abundant. By Aug. 15 there were sales everywhere.”
Delia's, a hot brand in girls' apparel, is but one example. Last August, the company, citing “planning miscues,” took “austere steps” to reduce excess inventory, and then staff. It posted a loss of nearly $11 million for the September quarter.
Such bad results will have at least one positive result. This year's season will be helped by the simple fact that retailers are “up against some really bad numbers from last year,” Cohen says.
Retail consultant Britt Beemer says he saw it coming. A year ago his firm, America's Research Group, surveyed 800 people and found a collective yawn when it came to back-to-school shopping. Eighty-six percent of those surveyed said they planned to buy fewer items, and in all they planned on spending 10 percent less than in 2001. He found more than a third of the respondents fearful for the economy and their jobs.
There's a whole lot more optimism now. In Beemer's latest survey of 413 people across the country, respondents said they plan to spend an average of $338.50 on back-to-school shopping this year, up almost 12 percent from $302.31 last year.
Beemer says that even while spending was falling, the number of units was holding its own or climbing. That means back-to-school budgets are being stretched through an increased emphasis on value shopping. “Where parents used to go to Burdine's to buy an outfit, now they're going to Wal-Mart,” he says. “Discount stores like Target and Wal-Mart particularly are now perceived as having as good a quality as other stores. That's paramount for us to understand these days.”
Another shift “is the number of consumers going to fewer and fewer stores. Today you can't afford to be someone's second choice, because being second could put you out of business,” he says. America's Research's latest back-to-school survey indicated 30 percent of consumers plan to shop at three stores, but 51.9 percent plan to shop at either one or two stores.
“When you look at the growth opportunities today, it's not necessarily getting more shoppers in the front door, but more shoppers who know what they want to buy,” says Beemer, adding that retailers need to get more focused in their advertising to better show young shoppers what they have to offer.
Beemer says this season probably will mark the continuation of another trend. “When teenagers go shopping by themselves for back to school, they go to the mall. But when parents are involved, the mall is becoming the second or third choice, in favor of freestanding stores like discount stores and power strip shopping,” he says.
The NRF partially credits the anticipated boost in back-to-school spending to the $13 billion in tax credit checks being sent to more than 25 million families. “The refund checks could not have come at a better time,” says Mullin.
Diversified Retail Solutions' Wright, a former top executive at Wal-Mart, sees such freestanding stores as Kohl's as big winners in apparel this year, while the big boxes will do well in hardlines. In both cases, basics will rule, he says: “There won't be a lot of foo-foo selling, but you'll see strength in the basics.”
Wright and others say most retailers are entering the season much better prepared than they were last year. “I don't think you'll see retailers really, really promoting,” says Wright. “They will be trying hard to manage their margins. And inventories are under control now, much more than last year. This ought to be a good season. I don't see anybody going belly-up unless they're really not running their company well.”
What retailers will do best? NPD's Cohen likes perennial specialty leaders Abercrombie & Fitch, Gap and American Eagle, as well as Delia's and The Children's Place. Department stores, he says, “will hold their own. If they have to, they'll promote to do it.”
Among the big sellers, Cohen says, will be electronic goods, including digital cameras and high-quality printers; apparel and footwear, and peripheral items like fragrances.
Whatever the product, he believes consumers will increasingly visit non-mall stores to buy it. “Consumers have become more educated about the benefits of non-mall shopping, and they're going to go back again this year,” he says. “Why do you need to go to the mall to buy a pair of khakis? We'll also see more people looking to buy well-known, name-brand electronic products at discount stores.”
“Shopping for value is the big thing,” Cohen adds, “and consumers know where to go to get it.”
LOOKIN' GOOD
Simon's McCarty says retailers are in better shape overall than generally believed. Those that survived the recent leanness have improved their cash management and their inventory management, he says. “We haven't seen any increase in store closings,” says McCarty, adding that rent growth remains strong and “retailers are still intent on growing. They are more disciplined.”
McCarty says retailers tell him they aren't going to extraordinary lengths to keep inventory down, “and we take them at their word on that.” Still, he says, “we're trying to interpret the signals. The whole area of comp-store sales has been so choppy in the past couple of years that we're seeing a very conservative approach among retailers. Our concern is that this is going to show up in inventory” — a possible damper on sales.
Making the comparable-store picture cloudier is the effect of deflation, which is likely masking an improvement to the bottom line. McCarty notes that the 3 percent to 3.5 percent price decrease in some apparel categories in the past 18 months “is one reason we haven't seen a spike upward in store closings.” Those lower costs are, in effect, disguising better financial health, he says.
Is there a chance that these expectations for an upbeat year-end won't pan out? Certainly. As retailers have learned in the past three years, world events can turn on a dime, and the optimism of August and September can be long gone by the beginning of December.
Still, the nation's economy has shown remarkable resiliency. It's been able to shake off terrorist attacks, recession and war and still make a good show of it.
“We're a bit desensitized at this point to the old set of problems that are still out there,” says McCarty. Maybe we've become a bit more realistic about what we think the impact will be on our business. We've learned to live with it.”
If the economy can manage a turnaround in the third quarter, he says, “we could see a tremendous Christmas.” As for now, “We don't see anything new out there to stay up late worrying about.”
Mom, I Have to Have It.
This year's basic back-to-school shopping list will include jeans, khakis, one pair of athletic shoes and one pair of casual shoes, says Marshal Cohen, senior industry analyst at NPD Fashionworld. And don't forget the gadgets. Today's students are technophiles and Apple ipods, laptop computers, Internet-ready calculators, single-use cameras and that old teenage standby the cellphone will all prove popular, he says.
After the first few weeks of school, families will head back to the mall to pick up a few trendy outfits based on what the kids have observed to be the right styles among their classmates. Surfer-style, denim, cargo pants, the 1970s peasant look and the increasingly lower low-rise pant are the only solid trends this year. But school officials and parents could put the kibosh on some of the super-sexy, skin-baring threads many retailers are pushing, he says. J.P. Morgan specialty retail analyst Brian Tunick says chains are betting on camouflage bottoms, velour sweat-suits and military influenced items to be big sellers. Gap's new Shield fabric, which repels stains and spills in girl's khakis, jumpers and skorts, is bound to be a selling point for moms.
The right styles and brands vary regionally, and even from school to school. One high school's most coveted jean could be a fashion disaster just a town over. The key for retailers is to target the kids who are true fashion leaders, Cohen says. What these kids buy will influence what their peers want to buy.
Top Women's Jeans Brands for 18 to 24 year olds
- L.E.I.
- Gap
- Levi's
- Old Navy
- Hilfiger
Source: NPD Group/NPD Fashionworld, Consumer Data Estimates