Retail Sales Need a Back-to-School Cram Session

For retailers, this year's back-to-school shopping season is scraping by with a B-minus at midterm, but some last-minute cramming could help -- perhaps making this the best late-summer shopping season in some time.

Despite forecasts that said parents will go back to pre-recession budgets, sales in July have been relatively soft, as consumers continue to shop selectively. However, observers hope last-minute shopping in August and September will lead to an improvement over last year's back-to-school season.

All told, retail observers expect July sales will be 3% to 4% above last year, when major retailers report their monthly tallies on Thursday. But pulling customers into the stores is still a chore, and retailers are stepping up promotions to draw them in.

Buying Indulgences, Saving for Necessities

Today's parents sometimes splurge, even paying for cosmetic treatments such as waxing and tooth whitening for back-to-school. But they also look for places to cut corners, according to the American Express Spending & Saving Tracker. The poll found even while 68% planned to shop for designer items, 93% say they will look for ways to stretch their budget, including shopping the clearance racks (76%) and looking for coupons and promotions (63%). The survey found 80% of parents plan to spend the same or more this year on back-to-school shopping, an average of $550 for a family of four.

Mike Berry, Director of Industry Research for MasterCard Advisors SpendingPulse, says consumers continue to shop, but they are highly selective, turning from one retail sector to another depending their needs and available promotions.

"What we saw in July is more of the same of what we saw in May and June," Berry said. "We continue to tread water."

As the financial markets turned down in July, shopper cut back on high-end items, said Berry. "Jewelry got hit hard," he added.

Items with an On Switch

Meanwhile, electronics sales were up 1%, according to SpendingPulse, which combines MasterCard's sales data and survey numbers for other payment systems to gauge overall consumer spending. That was helped by back-to-school shopping, said Berry; items such as computers and software are the first things on many shoppers' lists, with clothing purchases left for later, even after the school year starts, he said.

Apparel sales slowed in July, after doing well in June thanks to retailer promotions. Most sectors -- such as women's, men's and footwear -- were down about 1%, according to SpendingPulse. The exception was "family apparel," the category that includes children's clothing, which was up 3.4% in July.

"Sectors are shifting back and forth. One month [consumers] spend on apparel, one month they spend on electronics, then they shift to auto repair and maintenance," Berry said. "There definitely seems to be some price shopping and trading down."

That's consistent with the overall consumer theme that developed during this spring and summer, after the unexpectedly strong holiday season of 2009, when shoppers hoped the worst of the recession was over. Now that the economy shows signs of recovering slowly and unevenly, shoppers are again playing it safe.

Hoping for Good News

"Consumers are out there looking, hoping for some good news on the economic front," Berry said. "In the first quarter, things looked like we were moving into a v-shaped recovery. In the second quarter it looks more like a wave, and we're in the trough of the wave."

Several retailers, including Target (TGT), Toys "R" Us and Sears Holdings (SHLD) launched holiday-themed promotions in July, a sign that they see the threat of weak consumer demand hanging over the second half of the year.

"Target's decision to hold 'Back in Black Friday' this far in advance of the holidays is a sign of what's to come in retail," said Credit Suisse First Boston analyst Michael Exstein, in a research note. That's not necessarily a bad thing, he explained, because it lowers the risk of having excess inventory left over later, and creates a sense of urgency among shoppers."

Retailers have learned to fine-tune their clearance activity, so shortfalls in sales should be offset by higher margins, noted Exstein. The end result should not have a significant impact on second-quarter results, he wrote. Most retailers will begin to report earnings in mid-August.

Busiest Time Is Yet to Come

In the short-term, August sales could still push the back-to-school season over the top. Back-to-school dollars are now spread across more weeks than before, so the key weeks of the shopping season fall between Aug. 15 and Sept. 5, noted Rob Samuels, retail analyst at Phoenix Partners Group.

"We caution investors that you cannot draw any conclusions from July into August," he wrote. "The bulk of back-to-school business is still ahead of us."