Back to School: K-12 Winners and Losers

By Berna Barshay

Thursday, September 3, 2020

► The back-to-school shopping season has been turned upside down this year…

The shift to fully remote or “hybrid” learning hasn’t just wreaked havoc on the lives of working parents across the country… it has also upended the important back-to-school shopping season for retailers.

This is retail’s second-biggest selling season of the year, after the winter holidays. Luckily for stores, a National Retail Federation (“NRF”) survey of nearly 7,500 consumers conducted in early July predicted 13% growth in back-to-school sales, with the average family with K-12 students spending $789 this year versus $697 in 2019.

On the surface, this seems like great news for retailers, but the news isn’t uniformly good for all traditional back-to-school retail players. Budgets to support at-home learning are allocated radically differently than on the typical back-to-school shopping list.

Extensive wardrobe refreshes, backpacks, school uniforms, and the shoes, apparel, and equipment used in team sports are all out this year.

On the other hand, technology is in… and lots of it. Computers, tablets, and headphones are being bought for remote learning. Gaming consoles are filling the void left by canceled sports and other after-school activities. Desks and chairs, hand sanitizer, and the ingredients for at-home lunches and snacks are also on the shopping list to support remote or hybrid learning.

This shift in spend is creating winners and losers. With 63% of K-12 families in the July NRF survey planning to buy computers and other electronics, up from 54% in 2019, electronics retailer Best Buy (BBY) and e-commerce giant Amazon (AMZN) are clear winners from the shift to school fully or partially at home.

With a reduced need for new clothes, only 37% of parents surveyed planned to visit a department store for back-to-school goods, versus 53% last year. Intention to visit clothing stores – like Gap’s (GPS) Old Navy or The Children’s Place (PLCE) – also dropped substantially to just 30%, from 45% in the 2019 survey.

One other casualty of reduced in-person school attendance might be coffee chains Dunkin’ Brands (DNKN) and Starbucks (SBUX), who could see reduced morning visits from parents post-drop off or teens on their way to school.

► Back-to-school changes have already become a sales headwind at some of the biggest traditional players in the season…

In their recent calls, a long list of retailers called out back-to-school weakness that presented in the third month of the second retail quarter (July) and had continued into August, the beginning of the third retail quarter.

The outlook at clothing stores like The Children’s Place, teen-focused Abercrombie & Fitch (ANF), and the Gap – which generates 25% of its sales across brands in kids – was decidedly cautious, with emphasis placed on inventory management, cost containment, and hopes for an extended back-to-school season that drifts into fall this year.

As Virginia teenager Annie explained to Vox earlier this week…

We usually get a new pair of shoes for the gym, and my sister and I constantly grow out of our jeans… I was talking to my mom and we were joking about how we’d only need shirts for the Zoom classes.

While acknowledging the weakness of the back-to-school season in traditional products like clothing, shoes, and backpacks, diversified retailers like Walmart (WMT) and Target (TGT) retained their upbeat tone. They acknowledged this was a tough spot, but emphasized the strength of their overall business and e-commerce endeavors. This makes sense because these companies sell basically everything – if a family skips the sneakers and backpack this year, and instead buys a computer or desk… Walmart and Target sell those things, too.

Big-box retailer Dick’s Sporting Goods (DKS) acknowledged that revenue derived from team sports products has been destroyed this year but remained upbeat because other elements of its business are seeing a surge in demand. Hiking, running, camping, and golf are all pandemic winners as they can be easily enjoyed while social distancing.

► Retailers are hoping that this back-to-school season is delayed, as opposed to canceled…

The back-to-school shopping season usually starts in early July and ends shortly after Labor Day, when late-starting Northeast markets make their return to school.

Because of the uncertainty over whether kids will go back to classrooms later in the semester or year after initially beginning with remote learning, retailers think many parents are deferring purchase decisions.

If you think in-person school will start in October, an old laptop may suffice. If team sports are scheduled to start in October – but you have your doubts about if it really happens – maybe you can hold off on new cleats.

Due to this uncertainty, retailers think back-to-school shopping will extend into October this year… and as a result they’re maintaining as much inventory replenishment and store layout flexibility as possible during what’s typically the shoulder season between back-to-school and the holidays.

As Target CEO Brian Cornell explained on the second-quarter earnings call…

Knowing that many parents across the country are still facing uncertainty about whether their children will be attending school in-person or virtually, we’ll be featuring our back-to-school assortment for an extended period this year, allowing parents to delay shopping until they have more certainty on their school district plan.

Last week, over at Dick’s, CEO Edward Stack explained that the company stands ready to meet demand, even if he’s less optimistic it will surface this fall in affected categories…

As we take a look at some of the school districts and states that have indicated that they’re going to delay sports, we’ve got some inventory to be able to service them. But we’re not sure that that’s actually going to happen when it gets right down to it, are they going to play or they’re not going to play. So, we’re being cautious as we go forward from a team sports standpoint in these fall sports.

Adding to the uncertainty is the expiration of the extra unemployment benefits at the end of July. These were only partially replaced, and the Congressional holdup persists over a second stimulus package aimed at consumers and small businesses.

►Despite the challenges to the consumer economy, the U.S. has a shortage of laptops…

Last week, Vox dove into the issue…

The problem is there simply aren’t enough laptops and tablets to go around, especially when it comes to low-cost Chromebooks.

Chromebooks are laptops that run Chrome, a simple operating system designed by Google, and can cost less than $300. They’re used by the majority of American school systems due to their comparatively low cost and Google’s push into the rapidly growing and increasingly lucrative education space, including apps like Google Classroom. School districts from Bozeman, Montana, to Austin, Texas, have reported backlogs in orders of computers needed for their students to participate in remote learning.

This is clearly a positive for Alphabet (GOOGL), which owns Chromebook-maker Google. For Best Buy, it’s a strong tailwind as well. While you can’t sell what you don’t have on hand, nobody other than Amazon and perhaps Walmart is in a better position in terms of vendor relationships with electronics manufacturers to get their hands on whatever supply is out there.

Tight inventory levels across the industry should however reduce the level of promotions, which boosts gross margins. As Best Buy CFO Matt Bilunas explained on last week’s earnings call…

In terms of Q3, I would – we would still expect to see a heightened customer demand and just overall some level of inventory constraints as we work through the quarter… Clearly the promotional cadence and events could change in Q3 and we – holidays will probably start earlier, but even with those we believe that the demand for the products and services we sell and also the inventory availability will continue to lend itself to the less promotional environment.

► One retailer has been particularly battered…

Last Tuesday, the children’s apparel chain The Children’s Place dropped 19% in one day when it reported a second-quarter earnings per share (“EPS”) loss of $1.48, dramatically missing the analyst estimate of negative $1.06 per share. Sales only missed expectations by 2%, but earnings were dragged down by product margins.

Liquidation sales at stores that were permanently closing hit gross margins, although these are a one-time drag. Another concern was the extra costs incurred by the high volume of e-commerce orders that were fulfilled by stores. Fifty-five percent of e-commerce orders were shipped from store, which is more costly and less efficient than fulfilling online orders out of a warehouse built for that purpose.

Other negatives in the quarter included too much school uniform inventory and a significantly negative outlook for traffic at the retailer’s more than 800 stores on Black Friday.

Most of these problems are one-time (closing stores, school uniforms) or industry-wide (holiday jitters). This is probably why the stock has quickly recovered and has made back two-thirds of its post-earnings price drop in just a few trading sessions. With department stores reeling, Ascena Retail (ASNAQ) – parent of competitor Justice – in bankruptcy, and having absorbed competitor Gymboree after its bankruptcy, competition in the children’s apparel category has been greatly reduced.

At this point, the major competitors still standing are Carter’s (CRI)… as well as Walmart, Target, and Amazon. The Children’s Place is tiny next to those big three, with less than $2 billion in sales and roughly $300 million in market cap. But when the pandemic ends, plenty of parents will want to shop in a smaller store than a big box, and not online.

Additionally, The Children’s Place has a great track record for delivering trendy, fashionable kids’ clothes at low prices. The company saw 118% growth in digital sales in the second quarter when stores were largely closed, and greatly accelerated its conversion of in-store customers into omnichannel ones and did a good job recruiting new customers (online customers grew 175% in total year over year). The company is rationalizing the store base, which makes sense.

This current environment will pass. And even if it drags on, kids grow… so they’ll eventually need new clothes, whether purchased in-store or online.

The Children’s Place likely has a couple of ugly quarters ahead, but longer-term, the company has the elements in place that should enable success. However, it probably needs to step up its e-commerce fulfillment capabilities… This isn’t the first time I’ve heard the company lose margin because of excessive ship-from-store fulfillment. This is the one broken element of the business that The Children’s Place needs to fix… but running an efficient e-commerce fulfillment operation requires skills that are out there in the market.

PLCE shares are down 64% year-to-date… and at $22, are down about 85% from their high in 2018. For long-term, risk-tolerant investors, The Children’s Place is an interesting speculation here.

► When uncertainty rules the day, the only path forward is flexibility…

This is true for retailers and applies as well to parents and their sanity. Comedy also helps, and this YouTube video from Holderness Family Vlogs makes great fun out of the tough decisions around education that parents are grappling with this back-to-school season.

► Today in the mailbag, reactions to the back to school series and one reader shares a bullish view on Apple (AAPL) shares…

Have you increased or decreased your back-to-school shopping budget this year? What did you buy? What are your kids or grandkids asking for? Let me know at [email protected].

“I think the universities are blowing smoke about the cost of paying athletes. The space in the classroom is free, the rooms are often vacant or cheap locally, and the food line is probably $100-200 max a week. Pay them $2,0000-$3,000 per year and pay EVERY player on the team. With $5m+ gates plus concessions, parking, etc. per game those elephant tears are phony. And, maybe, demand the NFL and NBA pay for their free minor league development programs.” – Dave V.

“Why do have to pay school tax… I want my money back.” – M.M.

“Hello Berna: Well, I sold Apple the last time it had a significant swoon (in 2018 at about $160… or $40 at today’s price) and I’ve watched its inexorable climb since then, and right after they announced the stock split, I jumped in again with 50 shares. I’m already showing a nice profit on that – and I’m tempted to sell, but will hold off for two reasons:

“1) the ‘Robinhood’ effect – I’m betting that once the price ‘drops,’ more people will want to jump on the bandwagon and the shares will continue to grow, but

“2) more importantly – I’m still using and enjoying my i-Phone 7 – but as soon as the i-Phone 12 drops – with hopefully 5G service – I may not stand in line for 2 days to order it but I do expect to order one fairly quickly – especially with ‘free’ financing from my cell phone carrier. And we’re only talking a few months for that to happen…

“I think it’s fair to say that I’m not the only one waiting for an Apple 5G phone… Side note – I had a Samsung phone once and it blew up on me – will never go back to anything but Apple…” – George R.

Berna comment: George, you likely weren’t alone in waiting for the split. The stock ran up over 30% between the announcement of the 4-for-1 split and its completion. We’ve heard promising news about the iPhone 12 since then, so the whole move can’t be attributed to the split.

AAPL shares have pulled back nearly 10% off the all-time highs over the last two days (with a big move today). I think this is a function of the trade around the split unwinding, as opposed to specific news. The only major news today is some comments from the German antitrust chief saying he’s following the Epic Games lawsuit (which I previously wrote about here) with “great interest”. It’s not news that European regulators are circling Apple, so I think we are seeing the split trade unwind.

Splits aren’t a financial event… they’re a psychological event. It used to be that splitting a nominally high-priced stock would open up the security to new retail owners… If you didn’t have $500 to buy a share of Apple, but you have $125, now you can play. But with popular app Robinhood allowing for the purchase of fractional shares, I wonder if that factor is as important as it once was.

In its four previous splits, Apple has underperformed the Dow Jones Industrial Average each time, with an average underperformance in the two weeks post-split of 5.4%. This is analysis from hedge-fund information platform Kensho. (If I had done it myself, I would have used the S&P 500 Index… with 30 stocks and composition weighted on price, not market capitalization, because I find the Dow a poor choice for benchmarking anything.)

As for your second point… that’s a fundamental viewpoint. I also have an older iPhone (in my case, the iPhone 8) and I also plan to upgrade. Many people think this will be a huge upgrade cycle for Apple. If you think the company will sell more phones than current earnings estimates incorporate, that’s a good reason to hang on. My reservations about the stock in the short- to intermediate- term at these levels relate to big expectations already being built into a lot of numbers as well as the price. I think Apple might do closer to $4 in 2021 EPS versus street estimates at $3.84. But with AAPL shares at roughly $120, I think the beat will need to be much bigger to propel the stock to new highs.


Berna Barshay
September 3, 2020

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Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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