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5 Stocks to Watch This Back-to-School Season

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The back-to-school (BTS) season is characterized by many things: the collective dread of students losing their newfound summer freedom, parents sharpening their fangs in preparation for the hunt, and major retailers stocking up for what will soon become a battleground. Paper, pencils, pens, erasers, notebooks, and much more are the upcoming spoils of war and everybody wants a piece.

Let’s take a look at how consumers may behave, along with the retailers that will likely experience high activity in the weeks to come.

What is the Back-to-School Season?

The BTS season is the time of year during which parents buy school supplies and clothing for the upcoming school year. This time period generally lasts from mid-July until early September, with Labor Day usually serving as the symbolic beginning of the school year.

Department stores generally respond to this time period by issuing sales for these items in order to compete with rivals for foot traffic. Although costs vary, this time of year is hectic for both parents of kindergarteners and college students alike.

What Does the Research Show?

The National Retail Federation (NRF) recently released the results of their annual consumer survey concerning the 2016 BTS season. Overall, it shows that families are more likely to spend freely on school and college supplies this year. Although still focused on finding sales, families appear to be largely less worried about the economy now than before.

As per the NRF’s data, total K-12 spending is projected at $75.8 billion, up from the $68 billion total of last year. Families plan to spend an average of $673.57 on clothing, electronics and supplies, compared to last year’s $630.26.

Families of college students are spending an understandably higher average of $888.71, which is lower than the $899.19 of last year. However, total spending this year is projected at $48.5 billion, over $5 billion higher than last year, as more consumers enter this market domain.

A stronger economy is correlated with increased consumer confidence, and this year’s data reflects the likelihood that BTS shopping will remain as busy as ever.

Stocks to Watch

Wal-Mart Stores (WMT - Free Report)

Analysts have raised WMT earnings estimates upward for both Q2 and Q3 FY 2017, which each encompass roughly half of the BTS season respectively. Q3 Estimates currently stand at $0.94 in earnings per share compared to $0.93 just 60 days ago. Estimates for this fiscal year stand at $4.27 compared to $4.24 60 days ago.

In our article about brick-and-mortar’s resiliency, we highlighted WMT’s status as the largest retailer on the planet with a growing online presence. Although the classification has some gray areas, NRF data shows that 60.5% of consumers plan to shop at discount stores, an umbrella that WMT does fall under.

WMT offers many sales early on in the season, and also price matches other BTS deals in order to remain competitive. It is likely that this goliath will continue to experience high foot track this season.

Wal-Mart currently sits at a Zacks Rank #2 (Buy).

Target Corp. (TGT - Free Report)

Analysts have not revised estimates for this or next quarter, but one has revised estimates downward for this fiscal year. The current fiscal year estimate stands at $5.16, down one cent from estimates 30 days ago.

As of July 25th, TGT currently offers up to 15% off school supplies. However, these generally scale higher as September draws nearer. TGT had guided estimates down for the current fiscal quarter, which they will report on in mid-August.

Although it has underperformed its industry peers, the BTS season provides an opportunity to serve as a much needed catalyst for Target, which currently sits at a Zacks Rank #4 (Sell).

Costco Wholesale (COST - Free Report)

Analysts have overwhelmingly revised earnings estimates downward for FQ4, which ends in August. Current estimates stand at $1.73 in earnings per share, down from $1.78 60 days ago. Estimates for this fiscal year are also down to $5.29 from $5.30 60 days ago.

COST has experienced disappointing comparable-store sales performance, and has missed the Zacks Consensus Estimate on revenue for six quarters in a row. Although COST continues to face stiff competition that could hurt margins, it remains a dominant warehouse retailer going into the BTS season.

For the last few years, COST has reported increased net sales year-over-year in FQ4.  Although it is difficult to attribute that solely to BTS shopping, it does likely play a role in the boost. Like other companies, COST is also offering various sales on school supplies, which like the rest of its merchandise, the company offers in bulk.

Costco currently sits at a Zacks Rank #3 (Hold).

Best Buy (BBY - Free Report)

Although estimates for the current quarter (ending in July) are down, there is 50% agreement in upward earnings estimate revisions for next quarter, which encapsulates BTS shopping. The Zacks Consensus Estimate has decreased a cent to $0.46 in the last 30 days, but the company has surprised on earnings for fourteen quarters in a row.

Best Buy faces stiff competition from industry peers, but offers numerous BTS deals on various devices that could bring in higher traffic and sales in the quarter to come. Either way, considering BBY’s current streak, outlook isn’t as bleak as it may seem.

Best Buy currently sits at a Zacks Rank #2 (Buy).

Amazon Inc. (AMZN - Free Report)

AMZN has experienced upwards earnings estimate revisions for both the current and next quarters. Current estimates stand at $1.14 and $0.96 in earnings per share, up from $1.10 and $0.93 respectively.

NRF data shows that 46% of consumers plan on doing some amount of BTS shopping online, up from 35.8% last year. Considering AMZN’s very strong position in the e-Commerce industry, it is in position to benefit directly from this notable boost in online shopping activity.

Although AMZN offers items in all departments, the BTS season could still provide further support to what has already been an already amazing run for the company.

Amazon currently sits at a Zacks Rank #3 (Hold).

Bottom Line

Although not as major as the holiday season, the BTS season offers a lot of opportunity for many companies. I vividly recall going to the store as a child in the last week of August and seeing aisles upon aisles of empty shelves in the shopping aftermath.

The BTS season will surely benefit some companies more than others, but investors should keep an eye on its position as a potential catalyst over the next six weeks or so.

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