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Parents vs. Stores: Who Blinks First?

This year, it's not just the parents who are breathlessly waiting for the kids to get back to school. Retailers are on edge, and the question is who will blink first?

PKeleher

Industry trade group the National Retail Federation released a survey earlier Tuesday that found more families had completed their school shopping compared with the year-ago period. That said, there is still is a lot of shopping that has to get done as the average family has completed about 43.2 percent of their purchases so far. Last year, by this time, about 41.6 percent of the shopping was done.

The survey also shows that consumers are shopping the sales. Seventeen percent of families with children in grades K-12 say 100 percent of their purchases were influenced by bargains and coupons, up from 14.7 percent last year.

Retailers are responding with plenty of promotions. Bank of America Merrill Lynch analyst Lorraine Hutchinson studied the prices on clothing at a number of specialty retailers, and found that pricing power is eroding for back to school.

Hutchinson said prices were beginning to dip at Aeropostale, Gap and Gymboree, breaking with a trend of generally mixed prices for all three brands.

"All three brands will continue to offer lower prices this fall, in our view, as they aim to maintain or take market share in an increasingly competitive retail environment," Hutchinson said.

The big question about promotional activity like this is whether it is beyond the discounts the company orginally intended. If it is, it can eat into profits.

Hutchinson said she suspects the lower prices at the Gap and Aeropostale could hurt the company's gross margins in the second half. But Gymboree said earlier this month that it has not needed to be as promotional as it originally planned, which led the company to boost its earnings forecast.

Margaret A. Gilliam, president of Gilliam & Co, an independent research and advisory firm that specializes in retail, said the promotional activity is especially pronounced among teen retailers.

"It seems to be very extreme right now," Gilliam said.

"What's happened now is that they are all mature, and they are banging heads against each other," she added. "It's time for a shakeout in these specialty chains."

According to Gilliam, teen chains have a lifecycle and periodically an old batch will lose their popularity only to be replaced by a fresh, new retail chains. This challenging environment, with teen unemployment at high levels, can prove to be a catalyst.

"Clearly, kids won't have a surplus of funds to throw around, but this important retail season should bear fruit for the smart operators," Gilliam said.

The NRF predicted earlier this summer that back-to-school spending on clothes, shoes, supplies and electronics would rise to an average of $606.40 from $548.72 last year.

Shoppers
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Shoppers

One concern is that with consumers saying they have completed more shopping now than they did at the same time a year ago, is there still room to meet this goal, especially given that comments from retailers have not been too rosy in recent days?

Perhaps not. Although the majority of those polled in the NRF survey said they would head to discount stores to do their shopping, discounter Wal-Mart Stores this week reported its fifth consecutive sales decline in the three months ended July 31 at its U.S. stores open at least a year. Traffic also declined at its U.S. stores for the third straight quarter.

Gilliam said she is not surprised by the weakness retailers are reporting. She expects a prolonged period of slow demand.

"You had a huge credit bubble and we have to have a correction," she said. "It takes a long time."

But there are pockets of strength. Sales of shoes continue to do well, with sales of boots expected to be particularly strong this fall. Sales of women's apparel also may do well compared with those in recent years, Gilliam said.

However, the question for department stores is: does strength in these areas offset weakness in others?

Sales of denim items have been particularly weak, which is another trend that has hurt teen retailers as those items tend to have higher profit margins, Gilliam said. She expects sales of skinny jeans and "jeggings,"pants that combine the fit of leggings with the look of jeans to sell well. The bad news for retailers is: these styles tend to be inexpensive.

Consumers also are doing more shopping online this year, but that may not translate into incremental sales if they are shopping at retailers with phsyical stores. The trend may be fueled by the budget-conscious, as it is easier to compare prices and find coupons online.

"You can contol your spending and discipline your purchases a little better online," Gilliam said.

Still, despite these negative signs, Gilliam cautions that July and August can be messy months. September sales will provide a better indication of consumer shopping patterns.

One reason is that consumers are buying items closer to when they need them. That means kids with limited clothing budgets may wait until they head back to class and check out what their friends are wearing before they finish their shopping for the fall. And retailers are counting down the days until that school bell rings.

Questions? Comments? Email us at consumernation@cnbc.com

Retail