Back-to-School Shopping Growth Suggests Improved Economy

By Markets Fool.com

It's hard to imagine given the heat, but for many schoolkids across the country, summer has ended, or it will fairly soon.

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Going back to school means buying school supplies, computers, and whatever else kids might need (or want) as they resume their education. It's a huge time of year for retailers, but it's also a very volatile period. Some years, people simply buy what they absolutely need while in others they indulge.

In 2016, it appears that back-to-school spending has improved, according to the National Retail Federation's (NRF) annual survey conducted by Prosper Insights and Analytics. The report found that American families are on a "stock up" cycle rather than a "make do" cycle, with the average family expected to spend more freely on school and college supplies this year.

Total spending for K-12 and college is expected to reach $75.8 billion, up from last year's $68 billion, according to NRF.

"Families are still looking for bargains, but there are signs that they are less worried about the economy than in the past," NRF President and CEO Matthew Shay said in a press release.

What it means for retailers

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People are spending more, but they are still being careful. That tends to benefit the most aggressive retailers, likeTarget (NYSE: TGT), Wal-Mart (NYSE: WMT), and Amazon.com(NASDAQ: AMZN).

"Heading into the second half of the year, we are optimistic that overall economic growth and consumer spending will continue to improve as they did in the first two quarters of the year," Shay said. "We fully expect retailers to be aggressive with offering great deals both in stores and online for back to school shoppers. And retailers will keep a close eye on inventory levels as families spread out their shopping throughout the summer."

Target "lifestyle expert" and mother of three Camila Alves shops for back-to-school items in this staged photo. Image source: Target.

How people are spending

Average spending for families with children in grades K-12 on apparel and accessories, electronics, shoes, and school supplies will increase in 2016 to $673.57 -- up from last year's $630.36 -- for a total of $27.3 billion, according to the survey conducted from June 30 to July 6. That's a 9.6% spike from 2015's $24.9 billion and a bigger average increase than has been the pattern given that spending has grown 54.8% over the past 10 years.

That spending breaks down to $9.54 billion on clothing (which 95% of surveyed families are buying), $8.27 billion on electronics such as computers or calculators (57% plan to buy), $5.12 billion on shoes (94% plan to buy), and $4.37 billion on school supplies such as notebooks, folders, pencils, backpacks, and lunchboxes (96% plan to buy). Parents told NRF and its research partners that they will spend an average of $235.39 on clothing, $204.06 on electronics, $126.35 on shoes, and $107.76 on school supplies.

Overall spending is actually driven by college students and families with children in college. That group plans to spend an average of $888.71, according to the survey, which is down slightly from the $899.18spent last year. An increase in college students, however, will drive total spending higher to $48.5 billion in 2016 compared with $43.1 billion last year.

"Whether it's laptops for class or mini-fridges for the dorm, college simply costs more than the lower grades," Shay said. "Some of these big-ticket items can last all four years, but when they need to be replaced, it's a bigger investment than pencils and lunchboxes."

Estimated college age spending breaks down to $11.54 billion on electronics, $7.49 billion on clothing, $6.23 billion on dorm furnishings, $5.78 billion on food items, $4.26 billion on personal care items,, $3.84 billion on shoes, $3.53 billion on school supplies, $3.14 billion on gift cards, and $2.7 billion on branded collegiate gear.

Why consumers are spending more

NRF said that "consumer confidence in the economy continues to grow and is a significant factor in how families will spend for back-to-school this year." That does not mean families are going to Target, Wal-Mart, Amazon, or other retailers with reckless abandon.

In fact, the number of families looking for sales increased, from 41% in 2015 to 43% in 2016, as did the amount of people comparing prices online (from 31% to 32%). But the number of people who are planning to spend less dropped to 23% from 27% last year. In addition, the group saying the economy will have no effect on their plans is at 27%, up from 24% last year and the highest level in the survey's history.

Where people are shopping

The NRF report does not name specific retailers, but its K-12 results seem to imply a mixed bag for Amazon, Target, and Wal-Mart. Discount stores remain the favorite for consumers at 61%, but that's the lowest level in the survey's history.

The most surprising number (and the most telling) may be that 46% of parents said they would shop online, a jump from 36% in 2015. For those online shoppers, 89% of those surveyed will use free shipping (which Amazon, Wal-Mart, and Target all offer once varying spending thresholds are met). In addition, 54% intend to use buy online, pick-up-in-store service, which favors Wal-Mart and Target.

College kids and their families also notched the highest level of saying the economy will not impact their purchasing decisions (30%) and only 29% will shop for sales, down from 35% in 2015. The older student group also saw the number of people intending to shop at discount stores drop to 44%, the lowest in the history of the survey. College bookstores also hit a new low, with 34% saying they will shop there, while online shopping as a choice dipped to 38% in 2016, from 39% last year and a peak of 45% in 2014.

NRF and its research partners compiled the results from a survey of 6,809 consumers conducted between June 30 and July 6. It has a margin of error of plus or minus 1.2% points.

What does this all mean?

Consumers -- at least ones with kids heading back to school -- clearly feel at least slightly more optimistic about the economy. That means they are willing to spend, but it does not mean they are willing to be foolhardy with their cash. They are still looking for sales, free shipping, and other deals. These are positive signs that also present a blueprint for how retailers should tackle the upcoming holiday season.

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Daniel Kline has no position in any stocks mentioned. His son got a backpack, some clothes, and not much else to go back to school this year. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.