Retailers: A Class Act?


By Amy Tsao Record-high oil prices, a recent slowdown in consumer spending, and heightened terrorism risks have many investors jittery about retailers, just as the critical back-to-school period starts. "Between geopolitics and the election, there's a lot of noise, a lot of negativity out there," says Liz Pierce, an analyst at Sanders Morris Harris.

However, analysts say that retailers can expect a solid back-to-school season, fueled by a strong demand for new fashions. In the last couple of years, purchasing was stalled in large part by the dearth of must-have styles that make kids -- and their parents -- spend. But this fall, a variety of fresh, compelling clothes will draw in customers and boost apparel sales, which make up the bulk of back-to-school purchases. "I believe the trends are strong and the consumer will embrace them," Pierce says.

JUNE BLIP. Among the hottest trends: Vintage and more polished styles for girls, and for both boys and girls, polo shirts, sweaters, and woven shirts in bold colors. Darker-wash denim in more conservative cuts will also be prominent on the racks. Based on its consumer-survey data, the National Retail Federation, a retail-industry trade group, expects to see back-to-school season sales increase a handsome 7% over the year-ago period. "There's lots of newness this year," says Jennifer Black, president of retail-consulting firm Jennifer Black & Associates, based in Oswego Lake, Ore.

True, this summer has been somewhat disappointing for retailers, but early summer numbers aren't generally a strong indicator of what will happen in August and early fall, when school buying is in full swing. July is considered a "transitional" month, when many stores are clearing out old merchandise, analysts note. Even so, many still expect a respectable showing for July same-store sales, which are due on Aug. Earnings tracker First Call figures that same-store sales for the month will rise by a decent 3.2%, after rising 2.8% in June. Anyone looking for further reassurance that the recent retail weakness isn't likely to persist need only heed the words of Federal Reserve Chairman Alan Greenspan, who considers June's lackluster readings on economic indicators a temporary blip in a robust recovery.

Still, it will take more than comforting words from the Fed to make shoppers lose their love of a bargain, which should be good new for retailers that offer hot deals on cool clothes. "Politicians may say the economy is great, but I don't think average consumers are feeling that," says Irma Zandl, president of research and trend-consulting company Zandl Group. "Everyone is cost-conscious at the moment."

SURF'S UP. Preppy American Eagle Outfitters (AEOS) should appeal to the price-sensitive, trend-conscious shopper -- and perhaps to investors cut from the same cloth. "It's not at the high end and not at the low end," says Pierce. "It's aspirational, yet attainable." The stock has run up 80%, to $31, since the start of the year, but she expects it can keep climbing. Pierce figures that for the rest of the year, same-store sales will easily show improvement, as the year-ago period was lackluster for American Eagle. Pierce rates the stock a buy and has a 12-month $37 price target on it.

Consultant Black is also a fan of American Eagle's comeback. She points out that although it shares the preppy mantle with Abercrombie & Fitch (ANF), American Eagle's easier-to-swallow prices give it an edge. Predicts Black: "They'll have a fabulous back-to-school."

Pacific Sunwear of California (PSUN) stock may be another smart play in this class. Shares have been under pressure as some fear that the retailer's skateboarding and surfing fare won't match up with the shift toward cleaner-cut preppy clothes. But that also means the stock may strike some as cheap right now. And the company has added polo shirts and more buttoned-down looks to accompany what Pierce calls "its unique niche of surfboard lifestyle." She's confident that Pacific Sunwear can beat challenging sales comparisons. She rates the stock a strong buy and figures it can rise from its current $20 to $31 in the next 12 months. Pierce does not own shares in Pacific Sunwear or American Eagle and her firm has no banking ties with either company.

FLEECING CONSUMERS. Value-oriented department store J.C. Penney (JCP) is also expected to be an above-average performer as it plays up the attractive styles -- and prices -- of its teen-apparel section. Likewise, Target (TGT), arguably the coolest of the mass-merchandise discounters, is expected to have strong traffic for the back-to-school season. Zandl observes that Target has been particularly good at juicing demand among young people for its affordable apparel and funky home goods.

Surprisingly, the luxury-retail group has held up better than the market's lower end this year, but that means it isn't likely to get as much of a boost from the school-bound masses. Still, there there are some potential standouts among the higher-end players. Thanks to its Juicy Couture brand, Liz Claiborne (LIZ) will likely get a lift from the most trend-aware teens. With fleece outfits that cost hundreds of dollars, Juicy Couture is a "big aspirational brand that teenage girls can't get enough of," says Black. Likewise, she says Nordstrom's (JWN) juniors' department, with a variety of popular, higher-end brands, should help drive a strong fall season for the department store.

Despite recent headlines that are spooking some, investors who do their homework may be able to find some good plays for the back-to-school season -- stocks that will send them to the head of the class. Tsao covers the markets for BusinessWeek Online


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