3 Stocks to Pencil In for a Record Back-to-School Season 

Advertisement

back-to-school - 3 Stocks to Pencil In for a Record Back-to-School Season 

Source: Mike Mozart via Flickr (Modified)

The National Retail Federation estimates that U.S. families will spend $76 billion in this year’s back-to-school shopping frenzy, an 11.5% increase over last year.

3 Stocks to Pencil In for a Record Back-to-School Season

Source: ©iStock.com/kali9

Experts are referring to the upcoming back-to-school season as a “stock up” rather than a “make do” year, suggesting parents can no longer let things slide when it comes to their kids. Clothes have gotten too small; school supplies need replenishing.

Retailers, both online and off, stand to benefit from this record spending. Families with kids in kindergarten through 12th grade are expected to spend an average of $674 on apparel, electronics, shoes and school supplies — almost 10% higher year-over-year.

Over the past decade, the K-12 category has become a significant profit center for retailers during the back-to-school season, with spending increasing 55% over the 10-year period.

This year, experts see less emphasis on bargains, as consumers have become more confident about the economy and less concerned about price.

These three retailers will benefit most from back-to-school spending in 2016.

Back-to-School Stocks to Buy, No. 3: Five Below Inc (FIVE)

Back-to-School Stocks to Buy: Five Below Inc (FIVE)While the evidence suggests that shoppers won’t be looking nearly as hard for deals in this year’s back-to-school season, that’s not to suggest they won’t want to save money on their apparel purchases.

Five Below Inc (FIVE) has just the business model to make that happen.

Serving the teen- and pre-teen markets, it sells nothing for more than $5. The company believes the 62 million young people in its target demographic are woefully underserved when it comes to value retail in the U.S. It’s positioned to take market share from other retailers less interested in providing teens and pre-teens with a quality product at an exceptional price.

Why is that important?

At the end of its first quarter, it had 458 stores open, a 19% increase over the first quarter of 2015. Its same-store sales grew 4.9% in Q1 2016, a 320 basis point increase over Q1 2015. The company projects it can open as many as 2,000 stores in the U.S. alone, perhaps more.

In fiscal 2016 it plans to open 85 stores. At this rate per year, it will take FIVE 18 years to meet those numbers.

Teenagers are projected to spend $33 on average for back to school 2016, about the same as last year, while pre-teens are expected to up their spending by 11% to $20 this year. Teens 13-17 represent about 18% of FIVE’s customer base while adults with kids 12-and-under represent another 22% or so. FIVE should get a nice pop from the kids back-to-school spending, let alone what adults will purchase on behalf of their children.

If its stock weren’t already up 60% year-to-date, I’d put FIVE in the second spot but given its valuation is slightly overheated — earnings yield of 2.1%, less than that of the S&P 500 — I’ll put it down as a strong third choice for back to school 2016.

Back-to-School Stocks to Buy No. 2: TJX Companies Inc (TJX)

Back-to-School Stocks to Buy: TJX Companies Inc (TJX)According to the National Retail Federation, the biggest beneficiary of back-to-school spending in 2016 will be discount stores such as TJX Companies Inc (TJX), where 61% of families are expected to spend money, higher than any other retail category.

In the clothing category, data suggests that back-to-school shoppers will spend $235 on clothing and accessories and another $127 on shoes this year, an uptick in both categories from 2015.

TJX just happens to be very strong in both of these areas. In fiscal 2016, its apparel revenues, including footwear, represented 55% of its $31 billion in global revenue. Another 15% came from jewelry and accessories.

TJX’s Q3 2016 results — August through October 2015 — saw the discount retailer grow same-store sales by 5% year-over-year which was better than analyst expectations. Earnings per share for the quarter also beat expectations at 86 cents per share.

With expectations for an even better back-to-school season in 2016 combined with a company that’s performing at the top of its game — Q1 2017 same-store sales up 7% and above plan — and although its stock is already up 14.5% year-to-date, investors should expect more appreciation heading into the all-important holiday season, buoyed by healthy back-to-school revenues.

Back-to-School Stocks to Buy No. 1: Amazon.com, Inc. (AMZN)

Back-to-School Stocks to Buy: Amazon.com, Inc. (AMZN)The NRF expects families to spend 30% more online this back-to-school season compared to last year. According to its survey, 38.5% of families will shop online this year and the biggest beneficiary of that spending will undoubtedly be Amazon.com, Inc. (AMZN) — and the rich get richer.

While many schools in the U.S. open in August these days, I’m going to assume everyone starts September 8, as is the case in New York City. According to the NRF, 22.2% of back-to-school shoppers (K-12) planned to shop at least two months before the start of school. In the case of back-to-college shoppers, that number jumps to 26.1%.

This is important because Amazon’s Prime Day fell on July 12 this year, within the two-month window. The shopping extravaganza set a record as the busiest day in Amazon’s history. Some of this shopping can be attributed to back-to-school, the second busiest consumer spending season on the retail calendar.

Retail advisory FBIC estimated that Prime Day would generate $525 million in revenue for Amazon, a 26% increase over 2015’s one-day event, the first of its kind for the company.

If that’s true, it’s a huge number.

This promotional event is a great way for Amazon to sell its various products and services such as Prime and Echo. But it also provides a nice lead-in to back-to-school shopping, another annual rite of passage.

No retailer on the planet has gotten the kind of back-to-school head start Amazon has. For this reason, it’s easily my first choice.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/back-to-school-2016-amzn-five-tjx/.

©2024 InvestorPlace Media, LLC