- - Thursday, August 26, 2010


As Labor Day approaches, many of us are contemplating the end of summer, pre-season football and squeezing in the last bit of vacation. There are others, however, who are gearing up for back to school.

To say I have not been eyeing back to school this year in particular would be a lie. With Commerce Department data saying consumer spending has weakened in recent months, the shots in the arm that retailers and consumer-product companies are counting on are back to school and the holiday season.

While the holiday season is still more than several weeks away, we are in the thick of back to school. For the uninitiated or those without kids, back to school is an annual ritual wherein students update their wardrobes with fresh clothes, sneakers, cleats, school supplies and other equipment they’ll need heading into the fall and winter months for school, sports and other activities.

According to the National Retail Federation (NRF), back-to-school spending is set to jump by 10.5 percent this year as Americans loosen their purse strings following a cash-strapped 2009. Per that study, combined spending will be $55.1 billion, making it second only to holiday shopping.

When it comes to these two important shopping periods, I find it rather important to understand where consumers are choosing to part with their dollars, for a rising tide in this case is not likely to lift all retail boats. Most tend to watch store traffic. Mall and department store traffic is one thing, but I find the better indicator to be “counting bags,” as I call it. This means keeping track of not only the number of shopping bags that buyers are lugging around, but also noting the origins of those bags.

In recent years, Apple, Forever 21, and others were the leaders in these informal surveys. Already, this year seems as if it will be a tad different, at least according to that NRF spending survey. More than seven in 10 respondents said they would shop at a discount store for school supplies this year, half will head to a department store, and more people will shop online: 30.8 percent this year vs. 22.2 percent last year.

This to me indicates that people are hunting for bargains as well as shopping for what they need, which means value is key. Apart from online and discount stores, which to me translates into Amazon.com, Wal-Mart, Target, Big Lots and others, consumers will take advantage of other dollar-saving shopping opportunities.

In states across the country, parents wait anxiously, school-supply list in hand, for a “sales-tax holiday” to make the cost of back-to-school shopping a little more bearable.

Several states, such as Virginia, Texas and Illinois, have already had back-to-school sales-tax holidays to help spur spending. Given expected state deficits, not all states are embracing these tax holidays. Georgia has become the first state in the country to announce that the popular tax break won’t be available in 2010. The looming $2 billion hole in the state’s budget was the primary factor in the decision not to offer the holiday this year.

Another difference this year is what is on those school-supply lists. Children in Alabama received a back-to-school list that included double rolls of paper towels, packages of Clorox wipes, boxes of baby wipes and garbage bags, liquid soap, Kleenex and Ziplocs. This is in addition to the usual items such as glue sticks, scissors and crayons.

Why? Because state and local financing, which make up almost all of public schools’ money, is falling because of budget-balancing efforts and lower property- and sales-tax revenues. As a result, according to Barbara A. Chester, president of the National Association of Elementary School Principals, “some of the things that have been historically provided by schools, we’re not able to provide at this point.”

Not to miss an opportunity to bolster their top-line in a challenging environment, retailers that you may not normally associate with back-to-school spending are looking to capitalize on this supply push. Items like Clorox wipes are prominent in school displays at OfficeMax while it also runs two-for-one specials on gum remover, disinfectant spray and other cleaners. Staples’ school fliers show reams of copy paper on sale, while Office Depot has added paper towels and hand sanitizer to its back-to-school aisles.

As an investor, this brings new companies to consider when looking for ways to participate in the back-to-school spending spree. To me, perhaps the biggest risk to consider as an investor is that forecasted back-to-school spending by the NRF and others fails to live up to expectations. On the one hand, consumers may not spend as much, owing to the recent uptick in weekly jobless claims and renewed concerns over a double dip in the economy. On the other, the need to make up public school supply shortfalls may reallocate the where and how much consumers spend on clothes, cleats, backpacks and the like that kids normally get when heading back to school.

Keep an eye on those shopping bags, and good hunting.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm located in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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