The back-to-school shopping season is off to a promising start, but retailers may be sacrificing profit for sales.
The National Retail Federation expects the average family with school-aged children to spend $669.28 for back to school items, up 5 percent from last year. That would be the second-highest amount since the industry trade group started tracking spending in 2004.
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But major retailers like Wal-Mart and Macy's are discounting merchandise and increasing spending to upgrade their stores and websites just to grab the attention of U.S. shoppers during the second biggest shopping period of the year. All that discounting and investing has worked to start the season off strong, they say, but it also hurts their bottom lines.
"Stores are going to have to invest in price and e-commerce aggressively in order to be competitive," said Ken Perkins, president of RetailMetrics LLC, a retail research firm. "The pie is not growing, and they've got to do everything they can to keep them from losing market share."
Wal-Mart, the world's largest retailer, says it's been investing in several ways to attract shoppers this season. The company cut prices on 10 percent more back-to-school items compared with last year. It also increased the number of back-to-school products sold on its website by 30 percent to 75,000 this year from last year.
The company also has made some long-term investments. Wal-Mart said it's doubling the number of smaller stores it has this year to compete with dollar chains. And it has increased its spending on its e-commerce operations to compete with online competitors like Amazon, a move that contributed to it slashing its annual profit outlook.
"In an environment where customers have so many choices about where to shop and how to buy, and many of them are feeling pressure on their budgets, we have to be at our best," said Wal-Mart's CEO Doug McMillon in a pre-recorded call Thursday.
But all that investing has hurt its results. On Thursday, Wal-Mart reported that its profit in the latest quarter was virtually flat during the latest quarter.
Kohl's Corp. also reported flat profit in its latest fiscal quarter on Thursday, as it cut prices, revamped its beauty departments, and spent on services such as one that enables it to ship online orders directly to shoppers from its stores.
The department-store operator also has started to roll out a loyalty program where shoppers get one point for every dollar they spend, with them receiving a $5 reward for every 100 points.
The retailer is hopeful its moves will boost business during the back-to-school shopping season: Kohl's said that in July it had its first gain in revenue at established stores in several months.
"I believe our customers will be excited by the newness that they find in our stores and when shopping online this fall," Kohl's CEO Kevin Mansell told investors Thursday.
Still, Mansell says the period is not a predictor of how shoppers will spend during the winter holiday shopping season in November and December, which traditionally is the biggest shopping period of the year. "Last year, we had a really good back-to-school business and then business died mid-September," he said.
For its part, Macy's Inc., which owns Macy's and upscale Bloomingdales chains, reported on Wednesday that its profit and sales for its latest quarter missed Wall Street estimates because it did so much discounting of merchandise.
The retailer also has been investing in its online business. The company said it just finished rolling out a program that allows shoppers to order on macys.com and then pick-up their order in stores. Additionally, the company said that it has sharpened its focus on customers ages 13 to 30, which has re-energized the back-to-school business.
"Macy's and Bloomingdale's are doing what it takes to win with the customer," Karen Hoguet, Macy's chief financial officer, told investors.
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