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Backpacks, Stanley water bottles and No. 2 pencils. This year’s back-to-school must-haves are a mix of the new and the (very) old. But the most important thing shoppers are looking for doesn’t appear on any lists: good deals. The stores that can deliver the best ones will win the season. The back-to-school shopping season — an important stretch for retailers that usually begins in earnest in July and lasts through early September — comes at delicate time. Inflation, while trending down from multidecade highs, has taken its toll on consumers, particularly those in lower-income brackets. Most shoppers are increasingly choosy on where and how they spend their money. Credit card debt is rising , and the labor market has softened. That backdrop has some on Wall Street expecting lackluster spending as families prepare for their kids to return to the classroom. Retail-focused Telsey Advisory Group, for example, anticipates “somewhat modest growth and an overall tone of consumer caution from a macro perspective,” according to a recent note to clients. But that environment plays into the strengths of some retailers. In fact, Tesley Advisory argued discounters and internet retailers — like Club holdings TJX Companies and Amazon — “are ready to capture share during the back-to-school shopping season by highlighting value-focused school essentials and discretionary products.” “In what could be a disappointing back-to-school season for many as consumers pull back spending, a company like TJX should fare better,” Director of Portfolio Analysis Jeff Marks said. “Its stores have increasingly become a go-to place for people to shop at due to its focus on quality and value.” TJX is one of “the best retailers to own here,” added Jim Cramer during the Club’s August Monthly Meeting on Wednesday. Electronics and sporting goods retailers face a varied outlook, Telsey Advisory said. But it contended one “bright spot” for that group of companies, known as hardliners, is likely to be laptop purchases due, in part, to AI innovations. For that reason, Club holding Best Buy , which carries an exclusive assortment of AI laptops, may be relatively well-positioned. “Best Buy is harder to read because the new AI laptops are expensive,” Marks acknowledged, “but longer term it should benefit from the many needing to replace their pandemic-era models.” The July retail sales report released Thursday morning painted an encouraging picture for TJX, Amazon and Best Buy. While clothing and clothing accessories stores saw a 0.1% month-over-month decline, department stores were down 0.2% — a group that’s been ceding market share to off-price companies like TJX. Meanwhile, sales at non-store retailers, which includes e-commerce players like Amazon, were up 0.2%. Electronics and appliances stores, a group including Best Buy, were up 1.6%. Back-to-school and college shopping is one of the biggest retail stretches of the year, offering important insight into consumer and retailer health. So far this earnings seasons, many companies have reported a slowdown in consumer spending, highlighting the mixed picture for retailers right now. Home retailer Wayfair , for example, cited a “challenged consumer in a difficult macro backdrop” during its second-quarter results that missed Wall Street estimates on August 1. Notably, CFO Kate Gulliver said Wayfair sees a “pronounced spread in performance between promotional and non-promo days,” a reflection that shoppers are looking for deals. The National Retail Federation projects a decline in back-to-school spending in 2024. In its “back to school and back to college ” survey released last month, the NRF estimated that consumers will spend $39 billion in back-to-school shopping in 2024, a 6.5% decline from $41.5 billion a year ago. At the back-to-college level, a 7.4% drop is expected, to $86.6 billion compared with $94 billion in 2023. Despite the year-over-year declines, the survey is projecting the second-most spending on back-to-school and back-to-college items in its history. TJX YTD mountain TJX Companies’ year-to-date stock performance. The hunt for value and discounts will be especially prominent among middle-to-low-income consumers who are expected to trade down to cheaper options, according to Dana Telsey, who founded the eponymous equity research firm and covers a wide range of companies in the retail sector. This is where off-price retailer TJX shines. Its ability to appeal to bargain-hungry shoppers has been on display since we took a stake two years ago around $64 a share. The stock, which now trades around $111, is up around 19% so far in 2024 — well ahead of the S & P 500’s consumer discretionary sector, which is up about 3% year to date. “When you think about [TJX’s] pricing strategy, they’ve been very competitive,” Telsey said in an interview. She added that TJX’s assortment of various brands, in some cases priced more than 50% off compared with traditional retailers, adds “to the excitement” about school shopping at its stores. TJX also should be a major beneficiary of back-to-college shopping, given it has “one of the biggest exposures to home [and] dorm decor,” Telsey added. In addition to carrying some of those goods inside Marshalls and TJ Maxx, the company also operates HomeGoods. In a note to clients last week, analysts at TD Cowen said they expect TJX to gain market share during this crucial summer shopping season, citing industry checks that showed weaker trends in back-to-school shopping across mall-based department store retailers and vendors. Analysts upped their estimates for second-quarter comparable stores for TJ Maxx and Marshalls to 4% from 3% and earnings per share, to 96 cents from 93 cents. The company will report results for the May-to-July period next week. Another company poised to capture share during back-to-school shopping is Amazon. Back-to-school consumers are more likely to shop around retail sales events like Amazon’s Prime Day, which took place July 16 and 17 this year, Telsey Advisory analysts wrote in its recent note. The e-commerce giant rang up a record $14.2 billion in U.S. sales during the 48-hour event, which offered deep discounts on a wide product selection. AMZN YTD mountain Amazon’s year-to-date stock performance. According to the NRF survey, 68% said they planned to shop during Amazon’s Prime Day for back-to-school and college deals. That’s the highest level over the past five years. “Amazon has created a shopping guide for customers to purchase items – including dorm room aesthetics, trendy decor, as well as technology items such as apparel, backpack and books – to make shopping easy,” analysts at Telsey Advisory wrote. Amazon’s fast fulfillment is an added bonus of convenience that shoppers consider in their shopping decision, the firm said. To be sure, the apparent success of Prime Day did not prevent Amazon’s third-quarter sales guidance from disappointing Wall Street when issued earlier this month. The softer consumer spending environment no doubt is an issue for the company in the coming months, but its outlook may very well have been intentionally conservative considering the tricky economic situation. It certainly didn’t change our big-picture outlook on the company. In fact, we added to our position Monday. BBY YTD mountain Best Buy’s year-to-date stock performance. Best Buy’s opportunity to capitalize on the back-to-school period is more narrow than TJX and Amazon, but it is there nonetheless. And it’s largely thanks to laptops. “Computers are a bright spot in electronics and should remain popular for back to school with innovation coming from AI enabled laptops,” Telsey Advisory analysts wrote. That is closely aligned with our thesis in Best Buy, which should benefit from consumers’ need to replace their electronics bought during the early part of the Covid-19 pandemic. This time around, they’ll have the chance to buy AI-infused PCs, some of which can only be found at Best Buy. About 40% of Microsoft’s roughly 40-item lineup of AI PC products is exclusive to Best Buy, the retailer has said. On Best Buy’s late May earnings call, executives noted the launch of the AI PCs coincided with the back-to-school period and the company’s marketing refresh . “We’ll use some of that new branding as we head into back-to-school,” CEO Corie Barry said then. Even though electronics piece of the July retail sales report was encouraging, the AI PC thesis is not about one single quarter or customer demographic, such as an incoming freshman who needs a new machine for college. It’s a multiquarter theme that provide a lift to Best Buy’s financials and stock price over time. (Jim Cramer’s Charitable Trust is long TJX, AMZN, BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Backpacks, Stanley water bottles and No. 2 pencils. This year’s back-to-school must-haves are a mix of the new and the (very) old. But the most important thing shoppers are looking for doesn’t appear on any lists: good deals. The stores that can deliver the best ones will win the season.
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