Behind Prime Day's rosy headlines are mixed signals for back-to-school season. These retail stocks will fare the best

Published Wed, Jul 19 202310:01 AM EDTUpdated Wed, Jul 19 202311:08 AM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

The bargain bonanza inspired by Prime Day last week is the first sign back-to-school shopping is underway, especially for consumers in the Southeast who have children starting school in a few weeks. Consumers are entering the second busiest shopping season of the year feeling battered and bruised, but spending is still expected to rise compared with last year as parents stock up on notebooks, sneakers and sweaters, according to several recent consumer surveys. The National Retail Federation is predicting record spending , whether students are heading back to elementary school, high school or college. The trade group polled more than 7,800 shoppers between June 30 and July 6 to reach its forecast of $41.5 billion in spending for K-12 students and $94 billion for college students. Still, it's worth remembering the pressure consumers are under. More than 40% of the 1,003 consumers polled by KPMG between June 6 and June 13 said they felt like they were in worse financial shape now than they were a year ago. Regardless, those stalwart shoppers told the Big Four accounting firm that they expected to spend more this year, with the average budget per student across all grade levels rising 21% to $377.09. Bracing for higher prices as wages fall Baked into that outlook was an expectation held by the vast majority of respondents, 82%, that prices will be higher this year than in 2022. Meanwhile, about half of those who expect to spend less this year said they simply don't have the cash to spend more, KPMG said. According to Capital Economics, consumers are benefiting from lower inflation, but they are working fewer hours and wage and employment growth are slowing. "With excess savings all but eliminated, the impact of higher interest rates and tighter credit condition[s] gradually feeding through, and student loan repayments scheduled to resume, we would argue consumption growth will continue to underwhelm in the second half of this year," Paul Ashworth, Capital Economics' chief North American economist, wrote in a research note after Tuesday's June retail sales report. This situation has made consumers budget conscious, according to KPMG. In its survey, many people said they would be checking off more of their back-to-school shopping lists online, where it is easy to compare prices, or at mass merchants, where prices are seen as more competitive. About 70% said they would look for early discounts to stretch their budget and defend against sticker shock. Another survey, conducted by commercial real estate services firm JLL in May , found very similar trends. That poll of more than 1,000 shoppers projected back-to-school spending would climb 15.7%. As in the KPMG survey, the gain largely reflected the perception that prices will be higher this year. Still, the budgets being allocated are far greater than the nearly 5% inflation rate Americans are seeing. Where shoppers are going Note: Consumers polled in the table above were told to pick the top three places they planned to shop. In the JLL poll, Walmart , Target and Amazon were among the top three retailers parents planned to shop, by a wide margin. Other retailers named were Old Navy , Kohl's , Staples, Macy's and Office Depot. Costco and Dollar General rounded out the top 10. But Stifel Financial said its consumer polling, conducted in mid-July, showed consumers actually plan to spend 19% less this year than they did last year. In a research note Monday, Stifel analysts led by Mark Astrachan said lower income groups are under pressure, dampening the wider spending outlook. "While still early, we find the anticipated lower spending notable and a watch-point, as it suggests continued weakness in general merchandise categories," Astrachan said. Costco and Walmart are best positioned in this environment, Stifel said, raising its price target for Costco to $575, which implies about 4% upside from where the stock closed Monday. The analysts attributed the increase to the potential for gross margin expansion as inflation eases and traffic and same-store sales rise. Stifel reiterated its price target of $163 for Walmart, saying, "We continue to see more upside than downside from current levels." Walmart shares closed about 5% below that level Monday. Stifel's survey also picked up growing fears about job security, with 12% of those polled saying they were worried. The fears were particularly pronounced among those who earn more than $100,000 a year, the survey said. That's key since higher income consumers make up a greater portion of consumer spending. Signals from Prime Day trends Looking at Prime Day trends as a barometer for how the back-to-school season could play out, Adobe Analytics said shoppers across the internet rang up $12.7 billion in sales during the two-day Prime Day event, up 6.1% from last year, which is a record. Still, it was below Adobe's forecast of 9.5% growth. Its analysis covered one trillion visits to U.S. retail websites. Jefferies analyst Corey Tarlowe looked at data from Sensor Tower to see how actively consumers were visiting Amazon, Walmart and Target during the retailers' sales days. In a research note Tuesday, Tarlowe said the momentum to Walmart's site accelerated into the promotional event, Amazon saw only a modest pickup and traffic to Target slowed going into Target Circle Week. "We believe this is a positive read for Walmart U.S.'s Q2 top line and serves as a proof point that Walmart is gaining mind and wallet share," Tarlowe said. However, he said he was "incrementally more cautious on TGT's digital sales growth in the Q2." All three companies are among those looking to gain the market share left behind by Bed Bath & Beyond's bankruptcy. Although the home goods retailer had been seeing its sales decline in recent years, shoppers will still need to buy these types of products, and some lucky retailer will become the new go-to for dorm room essentials such as bedding, storage caddies and corkboards.