Market Health

Is It Too Soon to Think About the Back-to-School Season?

On the East Coast, the scourge of the 17-year cicadas is finally receding.

And now we can sit outside on our decks without being pelted and harassed by one of the dumbest insects on the planet.

It’s hard to believe that June is more than halfway over.

But now we have to start thinking ahead to the next major spending season on the horizon: back to school.

It feels like school let out just days ago. But as investors, we always need to keep our eyes on the future. So it’s never too soon to start thinking about positioning ourselves for back-to-school spending.

Typically, back-to-school shopping kicks off in mid-July and stretches into early September. Though we could argue that the season unofficially starts with Amazon‘s (Nasdaq: AMZN) annual Prime Day celebration, which starts today.

Analysts expect back-to-school sales to increase 5.5% this year, with e-commerce sales rising 7%.

But with schools reopening for in-person learning, spending is projected to shift heavily toward apparel. In fact, back-to-school apparel sales are expected to surge 78.2%. Electronics are also forecast to have a strong season, jumping nearly 14%.

This is expected to be a boon for discount retailers, like Dollar Tree (Nasdaq: DLTR), Five Below (Nasdaq: FIVE) and Ross Stores (Nasdaq: ROST).

Apparel stores are also dressed to impress this year. Chains – like Levi Strauss & Co. (NYSE: LEVI), Urban Outfitters (Nasdaq: URBN) and even Macy’s (NYSE: M), which has struggled in the past – are expected to have a strong third quarter.

But one of my favorite plays for the back-to-school season is Dollar General (NYSE: DG).

At the height of the pandemic, Dollar General emerged a winner as consumers flocked to its locations, drawn in by low prices on essentials. And last year, to help consumers be more efficient, it launched pOpshelf, DG Go mobile checkout and DG Pickup.

Seventy-five percent of Americans live within 5 miles of a Dollar General store. And this convenience makes it well positioned to benefit from the upcoming, hectic back-to-school spending splurge.

The retailer has all of the school essentials stocked, from crayons to hand sanitizer.

In the first quarter, sales came in at $8.4 billion. This was a slight drop year over year but a far smaller drop than what Wall Street anticipated.

But the company is about to see sales drive higher…

For the second quarter, Dollar General is expected to see $8.56 billion in revenue with earnings of $2.55 per share.

The reality is back-to-school season is merely the beginning of a very busy period for retail. The back half of the year is chock-full of consumer spending holidays with annual Labor Day sales, Halloween and the looming Christmas shopping season.

And the outlook for all of this continues to strengthen.

For 2021, the National Retail Federation (NRF) is forecasting retail sales will grow between 10.5% and 13.5%. That would mean sales would total between $4.4 trillion and $4.56 trillion. And more than $1 trillion of that would originate online.

What’s more is this current projection is a major step up from the NRF’s initial expectation that retail sales would grow 6.5% this year.

It may feel early, but it’s not too soon to start positioning yourself for back-to-school season and the gauntlet of consumer spending holidays on the calendar in the third and fourth quarters.

There are clear signs that the economy is strengthening and consumers are remaining resilient. The U.S. is in store for the fastest economic growth since at least 1984.

All of this means that now is a perfect time to snatch up shares of retailers – before the annual spending sprees in the months ahead.

Here’s to high returns,

Matthew

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