NEW YORK (Reuters) - Investors betting on retail stocks this back-to-school season are looking to the current class leaders and expecting them to keep posting high marks.
Seasoned stock pickers are urging clients to invest in shares of discounter Wal-Mart Stores Inc (WMT.N), online seller Amazon.Com Inc (AMZN.O), teen chains Aeropostale Inc ARO.N and American Eagle Outfitters Inc (AEO.N), and apparel chain Gap Inc (GPS.N).
“Market share tends to beget market share. Winners should continue to be winners,” said Walter Stackow, an analyst with Manning & Napier, which owns retail stocks.
The back-to-school season is the second-biggest consumer spending event for merchants after the end-of-year holidays. The season typically runs from late July into early September as students gear up for the coming school year.
Total back-to-college spending is expected to reach $53.5 billion this year, while total spending by families with children in kindergarten through 12th grade is expected to be $30.3 billion, according to industry trade group National Retail Federation.
And this season the gap between the haves and the have-nots will widen, investors said.
Many are staying away from stocks of Abercrombie & Fitch Co (ANF.N), office supply chains Staples Inc SPLS.O, Office Depot ODP.N and OfficeMax Inc OMX.N, and department stores such as Kohl’s Corp (KSS.N) and J.C. Penney Co Inc (JCP.N).
Penney is reeling from a disastrous first quarter under its new pricing strategy. While the company has said things would improve later in the year, Penney heads into back to school before the store remodels and new merchandise lines that are the other prong of Penney’s transformation strategy have time to take hold.
“They have been pathologically underperforming under the new strategy,” said Shawn Kravetz of Esplanade Capital. “They have a lot to prove. I suspect it will continue to be a challenge.”
Frank Badillo, senior economist with Kantar Retail, said the negative reaction to Penney’s shift away from sales and coupons was spurring “what seems to be a response by Kohl’s and I imagine other retailers to perhaps be a little bit more promotional to counter, to be a stark contrast to what J.C. Penney is doing.”
“I think that may add to some of the promotional nature of the back-to-school season that we’ll see,” Badillo said.
Penney and Kohl’s also face consumer plans that favor discounters over department stores. Only about 44 percent of participants in a ICSC-Goldman Sachs consumer tracking survey conducted between July 12-15 said they planned to buy their school supplies and apparel at traditional department stores. About 83 percent of them plan to visit discounters this season.
Penney’s stock has fallen 44 percent year to date, while Wal-Mart’s shares have risen 22 percent in the same period. The larger S&P 500 Index has risen 9.2 percent year to date.
Graphic: valuation of top retailers: link.reuters.com/teg59s
More cost-conscious Americans plan to compare prices and do their shopping online this season. About 39.6 percent of participants in the NRF survey said they will purchase back-to-school items online this year versus 21.4 percent in 2007.
The rise in online shopping will be a big boon for Amazon and eBay Inc (EBAY.O).
“Amazon and eBay have the potential to gain share as more consumers buy merchandise online,” said Michael Koskuba, senior portfolio manager at Victory Capital Management.
The trend may hurt office supply retailers and sellers of hard goods, Stackow said.
So the specialty chains are trying to fight back.
Consumer electronics retailer Best Buy (BBY.N) is trying to take the store to college campuses. It is installing “buy boards” on 30 big university campuses, which are essentially billboards with product photos and codes that students can scan, using a smartphone. This will let students quickly order items and have them delivered to the campus or to a nearby Best Buy store.
Staples is offering customers extreme penny deals. It has also brought back a program that lets customers save 15 percent on supplies including pencils, paper, notebooks and backpacks.
But online retailers and discounters are countering.
In addition to regular seasonal deals, Amazon is promoting an ongoing free membership program created especially for college students called “Amazon Student.” Members of the program will get six months of free two-day shipping with Amazon Prime, e-mail alerts for discounts, and Amazon Prime shipping benefits at a cost of $39 (half off) a year for up to four years.
Walmart is offering more than 100 back-to-school items for teachers and students for less than 88 cents, while Target Corp (TGT.N) hopes to woo shoppers with more online coupons and backpacks and lunch boxes featuring animal-print and peace signs.
Additional reporting byPhil Wahba in New York, Jessica Wohl in Chicago and Alistair Barr in San Francisco; Editing by Steve Orlofsky