Retailers Look for Back-to-School Boost as Stimulus Effect Wanes

(Bloomberg) -- The back-to-school season has always been important for U.S. retailers, and this year’s is likely to be a doozy.

Consumer wallets fat with stimulus checks helped Walmart Inc. and Target Corp. blow past sales estimates in the first quarter, but those funds will dry up at some point. Stepping into the fold, analysts expect an unprecedented shopping season as more school districts and colleges plan to partly or fully resume in-person classes this fall.

Both retailers have rallied since early March when the latest round of stimulus payments neared approval. Target is up 34% since a recent low on March 4 and Walmart has risen 11% over the same period, bucking concerns that they would have a hard time matching last year’s pandemic-generated sales surge. Whether the gains can continue may rest on the strength of student spending.

“The back-to-school period is going to be wildly successful,” for Walmart and Target in particular, Gordon Haskett analyst Chuck Grom said in an interview. “You are essentially going to have two years’ worth of college kids going back to college for the first time.”

Target said last week it’s planning for one of its biggest back-to-school seasons ever. Spending is also likely to bode well for apparel retailers such as Gap Inc., which said this week that “customer exuberance” is setting up its Old Navy brand for a strong performance.

Related: Horowitz Says Abercrombie Already Seeing Back-to-School Benefit

Some consumers have more money available after cutting back on travel, dining out and other discretionary spending during the pandemic. With the personal savings rate skyrocketing during the pandemic, “that would free up an incremental $2 trillion in spending power,” DA Davidson analyst Mike Baker estimated.

As the economy reopens more, consumers will start to lean toward categories such as travel and entertainment, but spending at retail stores will remain high before the excess cash runs out, according to Edward Jones analyst Brian Yarbrough.

‘Get Out’

What’s clear is consumers are coming back to stores. For the first time in more than a year, Walmart saw its in-store foot traffic rise in April.

U.S. customers “clearly want to get out and shop,” Chief Executive Officer Doug McMillon said in the company’s earnings statement last week.

The trend was echoed by Target, which reported in-store comparable sales climbed 18% in the first quarter. Costco added to the upbeat retail results on Thursday, posting same-store sales growth that outpaced analysts’ projections in its fiscal third quarter.

The question is whether big box retailers can maintain their growth pace in the long run after demand slows down. For deep-pocket players like Walmart and Target, share buybacks can offset some weakness in earnings, but in the world of retail, multiple expansion is always based around same-store sales, Yarbrough said.

“At some point, they are going to hit that wall,” he said. “It will definitely get much more difficult moving forward to see these outsize same-store sales numbers, these outsize earnings seasons and guidance raises.”

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