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Tickers in this Article: BKE, GYMB, URBN, CTR, ARO
It's almost time for parents and students to begin back-to-school shopping, and retailers are hoping - against all odds - that consumers will open their wallets for the sixth consecutive year. According to the National Retail Federation, this year's haul should add up to $47.5 billion - if you include college students in the equation. The average family with students in kindergarten through grade 12 are expected to spend 7.5% less, breaking the winning streak. Just to be sure, I checked with an additional source (Piper Jaffray), and it projects a decline of 13% for apparel and 15% for shoes. Either way, analysts are expecting very little revenue growth this year, which means they think retailers will make things happen on the bottom line instead. Let's look at some of the current margin leaders and assess their chances of success.

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Top-Five Apparel Stores

Company
Current Pre-Tax Margin
5-Year Average Pre-Tax Margin
Difference +/-
Buckle (NYSE:BKE)
21.4%
17.9%
3.5
Gymboree (Nasdaq:GYMB)
14.6%
12.2%
2.4
Urban Outfitters (Nasdaq:URBN)
16.0%
16.6%
(0.6)
Cato (NYSE:CTR)
6.4%
7.3%
(0.9)
Aeropostale (NYSE:ARO)
13.9%
12.9%
1.0

This Time Last Year
Before we can figure out what's going to happen in this year's back-to-school sweepstakes, we need to understand what happened to retailers last year at this time. The back-to-school season generally takes place in the month of August, although many retailers are now starting in July. It would be simple to compare the same-store sales from August 2008 for all five companies in the table above. Unfortunately, two of them (Gymboree and Urban Outfitters) only release same-store sales numbers on a quarterly basis, so the next best thing is to compare the third quarters for each retailer. All five encompass the months of July, August and September, making it a better (and possibly more accurate) reading of the retail industry at any given time.

Always Competitive
In August 2008, retailers averaged same-store sales growth of 2.4%. The industry was still operating in the black and looking for continued success in the months that followed. As we now know, that didn't happen. Instead, the economy headed south and pocketbooks got lighter. However, not everyone suffered from this change in spending. Buckle and Aeropostale went on to have very strong holiday revenues and they've been hanging tight ever since. As for back-to-school, the best same-store sales increase in the third quarter came from Buckle, up 19.1%, and the worst was a tie between Gymboree and Cato, both down 2%. In the middle of the pack were Urban Outfitters and Aeropostale at 10% and 7% respectively. Up to this point in 2008, it was obvious which retailer was the best of the top five. Could that possibly have changed as we approach the new school year?

Thoroughbreds Get Tired Too
Buckle's same-store sales increase in June was 9.6%, 40 basis points away from its 23rd consecutive double-digit increase in comparable sales. Even worse, Aeropostale overtook it, generating 12% same-store sales growth in an otherwise horrible month for retail. So, what exactly does this tell us about the back-to-school season? Well, don't expect any miracles in August. I wouldn't be surprised if all five retailers were negative come early September and the reporting of the previous month's same-store sales. Consumers are still digging out of this recession; if we're lucky, things will turn around by Christmas.

Bottom Line
I usually don't agree with analyst predictions, but this time I must. Retailers are going to do everything in their power to increase margins during this critical period, so don't bet on there being a lot of deals in the malls. (To learn more, check out Analyzing Retail Stocks.)

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