Market veterans know how much the months between August and January mean to the retail stocks they follow. Heavy shopping opens with the back-to-school promotional offers and winds down with the post-holiday clearance sales. But with the start of the season getting earlier and earlier—Best Buy held a Black Friday in July sale!—investors need to adjust.
The earlier retail season has significant ramifications. While teen-oriented clothing chains like Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) still say August is the key to their fall quarter, the ads have started drumming up sales in July over the last few years.
Overall, this strategy has worked. Getting a jump on the back-to-school season has helped these retailers grab a bigger share of families’ budgets. But for this year, the National Retail Federation expects families will spend 7% less, so with those dollars already off the table, August promises deeper and deeper discounts on everything from backpacks to dorm furniture. There is a tradeoff here, as steeper discounts may mean more sales volume, but it comes at the expense of a smaller profit margin.
The good news is that analysts are betting on heavy shopping this first weekend of August in several key states – accounting for 10% of the U.S. population – as sales tax holidays give shoppers an incentive to hit the mall. The bad news is that some of these retailers are in make-or-break territory and really need blockbuster back-to-school numbers to make their year-over-year comps.
Take American Eagle Outfitters for example. In recent years, the traditionally slow spring quarter accounted for 19% to 20% of the company’s total sales. But with the top line already down 4% this year, management has to make up an extra $1 million a week for the rest of the year simply to hit Wall Street’s already low growth targets.
AEO tends to bring in about 60% of its receipts between August and January, so a good back-to-school season could generate enough momentum to drive a solid holiday season and make investors happy when the next annual report comes around. Failure, of course, will be punished.
Here’s another change: Because of the way AEO’s fiscal year is set up, we ordinarily wouldn’t get a clear sense of back-to-school sales until the November earnings release. However, the more the company managed to push those sales earlier into July – before the August 3 quarter end – the more insight we get into the strength of the season and how hot these clothes are actually going to be this year.
My sense is that households are still a bit cautious, but with so much riding on the numbers, look to AEO to trade actively going into the earnings release on or around August 21. Guidance is for flat sales and consensus is still on the high end at 21 cents of earnings per share, but any flavor on July in particular may force the speculators to adjust their positions very quickly to get ahead of the trend.
Retail Trading Rhythms and Long-Term Impact
Late summer has marked a seasonal upturn for several youth retailers for years now. AEO ran up 50% from July to October in 2009, 38% over the comparable period in 2010, and a spectacular 127% from August 2011 all the way to September last year.
Likewise, mall rival ANF launched into a three-digit rally in July 2009, paused a few months before repeating the feat in July 2010. The 2011 and 2012 summer bumps were shorter and smaller, but traders still found plenty to work with before the stock peaked in September and October, respectively.
Abercrombie & Fitch is set to report its summer quarter the day after AEO and has a similarly low bar to hit: Wall Street expects 1% sales growth and EPS around 30 cents. Unlike AEO, the chart here looks like it already turned on June 24, with the stock surging 18% in the last five weeks.
The key question is whether this is the early stages of another huge bull run or simply another cycle. The answer to that will depend on what the looming numbers reveal about back-to-school sales.
Although both of these stocks have rewarded investors who get into the seasonal groove, that very cyclicality has prevented them from becoming truly attractive as long-term holdings. ANF has only occasionally broken above its current level of $51.67 over the last 21 months and at its worst has broken below $30.
AEO’s annual back-to-school runs have been punctuated by spring declines. As a result, the stock’s overall performance has trailed the S&P 500 by a substantial margin over the last four years, and I see no indication of this changing anytime soon.
Ultimately, of course, while chains like ANF and AEO are still intensely seasonal, there are signs that e-commerce and post-recession bargain hunters are slowly working to smooth out the infamous bumps in the U.S. retail calendar.
Across all clothing and accessory stores, the August through January period accounted for 51.4% of full-year sales 10 and 20 years ago, but as back-to-school stretches toward July, the front half of the year has filled in more than half the gap.
The winners in the retail marketplace are the companies that can get ahead of that trend and ring up sales before last season’s merchandise gets stale enough to trigger discounting and shrink profit margins. AEO or ANF may be on top of that calendar shift, and we’ll know more in a few weeks.
Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.