August marks the end of summer for many students and the start of a new school year. After the winter holidays, the back-to-school season is the second-most important shopping season for retailers. As a result, retail stocks are poised to gain handsomely during this time.
According to a forecast from professional services firm Deloitte LLP, back-to-school spending will reach $32.5 billion, up 16% from 2020 and 17% from 2019 as parents and students gear up for an in-person classroom experience after a year of virtual learning.
But there are challenges as well. Inflationary pressures are mounting. Delays at global ports could contribute to inventory shortages. And, the back-to-school shopping season stretches from June to late September, making it tough to manage inventories and plan promotions.
There are certain themes you should watch when investing in back-to-school retail stocks. For example, although there will be strong demand for a variety of goods, technology and apparel will be two key areas. Apparel retailers will be the biggest beneficiaries since many students will be forgoing Zoom (NASDAQ:ZM) classes for in-person learning.
Each retailer will be affected differently by the season as students buy supplies they skipped over last year. Let’s also not forget college students, who will be shelling out cash for bedding and bathroom items.
These five companies stand to benefit exponentially from this unique season:
- Dicks Sporting Goods (NYSE:DKS)
- AT&T (NYSE:T)
- Dollar Tree (NASDAQ:DLTR)
- Texas Instruments (NASDAQ:TXN)
- Walmart (NYSE:WMT)
Retail Stocks: Dick’s Sporting Goods (DKS)
DKS might seem like a curveball on this list of retail stocks. But a return to school means a return to athletics. Despite the novel coronavirus pandemic, net sales for the fiscal year rose 9.5% to around $9.58 billion. Consolidated same-store sales grew a record-setting 9.9% despite temporary store closures during March, April, and May. Most impressively, e-commerce sales soared 100% for the full year 2020.
In May, the sports retailer unveiled fiscal first-quarter earnings and revenue that handily exceeded analyst estimates. Dick’s net income surged to $361.8 million, or $3.41 per share, from a loss of $143.4 million, or $1.71 per share, a year earlier.
Revenue jumped 119% to $2.92 billion from $1.33 billion a year earlier. Same-store sales surged 115% year over year, the company said, which included e-commerce growth of 14%.
This is a key metric for any retailer moving forward. DKS is well aware of this; that’s why it has spent millions of dollars creating a distribution center to serve its e-commerce site better.
CEO Lauren Hobart said the retailer saw a resurgence in its team sports business during the quarter, as kids returned to activities following a year when authorities canceled many youth sports. We can expect that momentum to continue as schools reopen, and kids get back to team sports.
AT&T (T)
Smartphones are part of our daily lives, and younger children are no exception. As a result, parents are looking for family cellphone plans. That brings telecom and media giant AT&T into the picture.
Over the years, the tech giant rewarded investors handsomely during its long journey to transform from a boring old telecom into a dominant player in new media.
But there have been two recent catalysts that have sent the share price into a tailspin. First, the company revealed that it would create a new company called Warner Bros. Discovery through a merger between its WarnerMedia subsidiary and Discovery Inc. (NASDAQ:DISCA). Subsequently, it will spin off 71% of those shares to AT&T shareholders.
AT&T also agreed to sell a stake in its pay-TV unit to private equity firm TPG Capital and carve out the struggling business. With no media assets remaining, AT&T will cut its dividend by about 50%, which will hurt the stock.
But there are positives to keep in mind. Once AT&T receives the $43 billion in payments from the new Warner Bros Discovery company and $7.3 billion from the new DirectTV company, it will pare down its $167.9 billion in net debt.
Mark Hake wrote an incisive article on the potential scenarios for AT&T stockholders moving forward. I recommend reading the piece to get more insight regarding the latest market moves.
Retail Stocks: Dollar Tree (DLTR)
Dollar Tree is one of the best back-to-school retail stocks because it targets an oft-neglected demographic – the savings-conscious consumer. Even if you have done all your back-to-school shopping, parents will have to make additional shopping trips once their kids tell them about the extra supplies needed.
DLTR has proven to be quite a recession-resistant stock. In fact, whenever there has been economic turmoil, Dollar Tree has done well because the company stocks essential items at affordable prices.
In its first quarter of fiscal 2021, Dollar Tree earned $374.5 million, or $1.60 a share, up from $1.04 a share in the year-ago period. Revenue rose 3% to $6.48 billion from $6.29 billion in the prior year’s first quarter. Analysts’ expectations were for EPS of $1.42 from revenue of $6.42 billion.
The company forecast muted growth for the full year, expecting to earn between $5.80 and $6.05 a share, with an uptick in same-store sales in the low single digits. Dollar Tree has predicted that freight costs will likely be higher in the remaining three quarters of its fiscal year than in 2020.
The downbeat outlook has led to DLTR stock losing some steam. And therefore, this otherwise excellent stock is trading at just 0.9 times price-to-sales. Although shares lost 14.6% of value in the last three months, that should not deter you from investing in this one.
Texas Instruments (TXN)
Texas Instruments has several segments. But it is mainly known for producing financial calculators. Now that kids are going back to school, sales of its well-known calculators are set to skyrocket. It’s important to note here, though, that this Dallas-based company generates about 95% of its revenue from semiconductors.
Right now, we are in the middle of a semiconductor shortage. In the current environment, companies such as Texas Instruments will continue to thrive.
Most recently, the major auto-chip supplier’s posted second-quarter net income of $1.93 billion, or $2.05 a share, compared with $1.38 billion, or $1.48 a share, in the year-ago period. Revenue surged to $4.58 billion from $3.24 billion in the year-ago quarter. Rich Templeton, president & CEO at Texas Instruments, said the revenue gains were were “due to strong demand in industrial, automotive and personal electronics.”
Texas Instruments expects third-quarter earnings of between $1.87 and $2.13 a share on revenue of $4.4 billion to $4.76 billion. Although the forecast is muted, reflecting decelerating growth from the second quarter, these are still healthy numbers.
Retail Stocks: Walmart (WMT)
Faced with a long list of back-to-school supplies, parents usually head to large general merchandise retailers like Target (NYSE:TGT) and Walmart. I am partial to Walmart because the stock is up just 3% in the last three months, marking a very rare dry spell for the retailer, which is an all-weather stock.
In May, the big-box retailer reported first-quarter revenue of $138.3 billion, an increase of $3.7 billion, from $134.62 billion a year earlier, exceeding Wall Street’s expectations of $131.97 billion. Net income rose to $2.73 billion, or 97 cents per share, from $3.99 billion, or $1.40 per share, a year earlier.
But revenue was negatively affected by approximately $4.2 billion related to recent divestitures in Walmart International. Additionally, there are concerns about inflation, slowing earnings growth, and the coronavirus delta variant. All things considered, Walmart has performed through thick and thin mainly due to the retailer’s operations.
During the pandemic, shelter-in-place orders prompted customers to stock up on food and household items and make more purchases online. Now that things are getting back to normal, customers are picking up bicycles and athletic gear from the Walmart nearest to them. In every scenario, the retailer benefits.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.