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Denim and athleisure top picks for back-to-school

With the second-biggest shopping season of the year now underway, analysts are cautiously optimistic that back-to-school sales will provide a much-needed lift for US clothing retailers thanks to several key trends and well-controlled inventory levels.

After tightening their belts and trimming back-to-school spending over the past two years, the latest surveys suggest US families are set to spend more freely on school and college supplies this year as they embark on a "stock-up" cycle as opposed to "making do."

Why this is so important to apparel retailers is outlined by Oliver Chen, analyst at Cowen & Co, who estimates the back-to-school season is worth around 18% of their total annual revenues (10% in August and 8% in September). For context, Holiday (December) just edges ahead at 19% of annual sales.

First forecasts from the National Retail Federation's annual Back-to-School Survey, conducted by Prosper Insights & Analytics, suggests back-to-school shoppers will spend an average of $235.39 on apparel, up 8% from $217.82 last year; and $126.35 on new shoes, up from $124.46 a year ago.

Likewise, the latest American Express Spending & Saving Tracker published this week suggests the average family is set to spend $293 on clothing and accessories a rise of 8.9% on last year, $145 on new shoes (against $120 last year), and $126 on outwear or jackets (compared with $106 year ago).

According to Chen, the last time the clothing and accessories category grew was four years ago in 2012, when back-to-school sales jumped by 12%. In contrast, the category declined in 2013 (-3%), 2014 (-3%), and 2015 (-6%). This year, "families are still looking for bargains, but there are signs that they are less worried about the economy than in the past," says NRF president and CEO Matthew Shay.

According to NRF, the forecast follows a pattern in which spending often increases one year as families stock up on supplies only to drop off the next as they get a second year out of longer-lasting items like backpacks or computers. Spending then increases in the third year once children outgrow clothing or items need to be replaced.

Richard Jaffe, analyst at Stifel, suggests the market is "underestimating the potential for the back-to-school season as many investors fear that the weak apparel trend evident for the past several quarters will continue."

Instead, he points to a relatively strong selling season driven by more broad-based acceptance of fashion trends, more normalised weather, well-controlled inventory levels, and a healthy macro backdrop – all supporting improved consumer spending.

Likewise, FBR & Co's Susan Anderson expects 2016 to be an improvement from 2015, "driven by innovation, increased spending, and improvement in supply chain efficiency."

Cowen's Chen has taken a closer look at the likely impact of the weather, and the timing of the tax-free holiday weekend when sales tax is not collected on items such as clothing and school supplies.

This year he notes there could be a slight headwind in August given the shift in the number of tax-free holiday dates this year compared to last. The weather, too, is likely to impede early back-to-school sales, with record heat through August not giving way to more favourable-for-autumn-apparel cooler temperatures until September.

And he believes back-to-school shopping is set to get off to a later start, but will likely continue into mid-September.

This view also appears to be borne out by the NRF, whose latest survey update shows that despite an early start this year, families appear to be holding out for price and value, shopping early and often in a bid to take advantage of aggressive deals as retailers get ready for autumn season merchandise.

Chen also suggests there are bigger issues afoot too, and that the continuing trend of consumers buying closer to need is likely to push sales further into September.

"Going forward, we continue to believe back-to-school is becoming less of a major sales catalyst, as consumers move more towards a buy-now, wear-now shopping mentality," he notes.

"Therefore, we believe the back-to-school selling season continues to be pushed later into September, as consumers prefer to 'see what people are wearing in school,' ahead of making purchases."

Top trends

When it comes to key trends, FBR's Anderson points to "some fashion newness (overalls, flared jeans, platform shoes) and innovation (stretch jeans, casual performance wear), which should drive improved demand, and a continued focus on athletics/athleisure (performance pants replacing jogger trend)."

Stiflel's Jaffe concurs, suggesting retailers are "operating with a greater sense of purpose; offering the consumer a clearer and more compelling reason for her to shop their brands (increased innovation, on-brand messaging and a clearly presented and edited trend message) likely driving traffic and sales."

Chen, meanwhile, agrees winners include less basic denim with more features and innovation; along with strong momentum in athleisure, with many retailers stepping up their presence in this category with more colours and fits.

Anderson says: "We continue to favour the children's segment for back-to-school given less exposure to structural shifts as children's apparel demand is more stable with kids growing faster in their younger years and needing new apparel every year." She cites The Children's Place and Carters Inc here.

"We also see active apparel/footwear – from the likes of Under Armour, Nike, Foot Locker and Finish Line – as a dominant trend, both from increased fashion reliance and healthier lifestyles." She adds this category is "a haven in specialty retail and apparel given the generally lacklustre growth in the non-athletic apparel market."

And in the teen/young adult category, Anderson favours American Eagle Outfitters "as it is best positioned to benefit from a return to denim with new innovation/washes. We believe Express and Abercrombie & Fitch could face pressure in back-to-school 2016 on tough compares/no catalysts."