Banking on the Back-to-School Crowd

So far, stores are doing well--especially if they're discounters

For Sandra Rogge, the back-to-school shopping season is in full swing. The 35-year-old mother of four kicked it off in early August with a $300 spree at a Target in Austin, Tex. Her quarry? Everything from basics, such as socks and underwear, to must-have Hello Kitty-themed clothing for her two daughters.

Dogged by sluggish sales in the first half of the year, retailers are counting on folks such as Rogge to help get cash registers ringing again. With sales in the second half of the year generating the bulk of retailers' annual revenues and profits, the next couple of months will be a good indicator of what's to come. Indeed, back-to-school sales make up as much as 15% of second-half consumer spending, according to Lehman Brothers Inc. "If back-to-school turns out to be bad, that's an extremely bad indicator," says Rick Gallagher, vice-president of the National Retail Federation.

HOPEFUL. So how's it going? Two weeks in, retailers say they're hopeful. Sales are "off to a decent start--especially for discount retailers," says analyst Richard L. Church of Salomon Smith Barney. Many industry observers expect that to continue.

Why? Despite rising layoffs, consumer spending should get a lift from several directions. Interest-rate cuts earlier this year may keep shoppers confident. And some folks have also seen a slight boost in their take-home pay because of payroll-deduction changes. Plus, $38 billion worth of tax rebates have begun arriving in consumers' mailboxes. With outfits such as Wal-Mart Stores Inc. offering to cash refund checks for free, the NRF figures at least $10 billion will be spent shopping.

Even Wall Street is optimistic. While retail stocks had been clobbered early in the year, they're up 20% year-to-date. That's 29 percentage points better than the Standard & Poor's 500-stock index. "The stocks are outperforming the market" because investors "are anticipating that [retailers'] numbers are going to look pretty good," says J. Philip Ferguson, senior investment officer at Houston-based AIM Capital Management Inc., which has a large position in retail stocks.

Another reason for investor optimism: limited downside. Fearful that layoffs, high consumer debt, and the economy's slump could spook shoppers, most retailers have kept inventories in check. At Gap Inc., inventory per square foot was down at least 10% to 15% when the second quarter ended in July, compared with a year ago. And at Express, a unit of The Limited Inc. that caters to women 16 to 38, inventories are flat vs. last year. "This is not one of those seasons where you want to be swinging for a grand slam," says Paul Raffin, executive vice-president of merchandising at Express.

GLUT? Unless, of course, you're stocking one of the must-haves of the season. This year's hot items include cell phones, Palm Pilots, and ergonomically designed backpacks with wheels. In apparel, wrap sweaters, crop tops, and open-back slip-in shoes for girls are in demand, while boys are stocking up on athletic sneakers, twill cargo pants, and print camp shirts. "Our products are turning over extremely well, even in a challenging time," says Michael Greenberg, president of trendy shoe-and-sneaker maker Skechers U.S.A. Inc.

But the hottest fashion trend is denim. Not your father's denims, but below-the-belly-button jeans, many of which are also flared, glittered, or studded. Levi Strauss & Co. says its Superlow jeans, priced at $30 to $80, are flying off retailers' shelves far faster than other items.

With all the major apparel retailers betting heavily on denim, some observers worry that a glut could hit by yearend. That could mean heavy markdowns. "Denim could be [this year's] leather pants," warns Todd D. Slater, an analyst at Lazard Freres & Co. Still, if those cell phones and other items keep moving, the second half may not be too bad.

By Stephanie Anderson Forest in Dallas, with bureau reports

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