Will Back-To-School Be A Bust? July Sales To Set Tone

Investors will get a glimpse of how much cash-strapped consumers are willing to spend in the key back-to-school shopping season when major U.S. retail chains release July sales results Thursday.

Retailers have eked out slim sales gains this year as rising gasoline prices, a crumbling housing market, tighter credit and higher grocery bills force consumers to pull back on spending.

Roughly $100 billion in tax rebate cash landed in the hands of consumers between late April and July, but it was not enough to keep retailers like Steve & Barry's, Mervyn's and Boscov's out of bankruptcy court. The industry is now on edge, wondering how and if consumers can be enticed to spend for the back-to-school season that got underway in July.

On Thursday, analysts expect retailers to report a 2.3 percent rise in July sales at stores open at least a year, below the 2.9 percent gain of a year earlier, according to Thomson Reuters research.

Discounters like Wal-Mart Stores and Costco are likely to outperform the competition as shoppers seek deals on food, gas and clothes.

Back to School or Bust

The back to school season is a big bust for retailers, with CNBC's Margaret Brennan

"Price will be the crucial determinant in terms of what (consumers) spend on," said Michael Niemira, chief economist for the International Council of Shopping Centers, or ICSC. (Watch the accompanying video for more on the back-to-school season stocks.)

Slowing Sales Trends

Through June, same-store sales have risen 2.4 percent, according to the ICSC. That surpassed the 2.1 percent rise notched at the same point a year ago.

But excluding Wal-Mart's results, which have been outpacing those of competitors as shoppers seek out its low prices, sales have risen just 1.1 percent -- far below year-ago levels.

For July, the ICSC is expecting same-store sales to rise 2 percent to 3 percent. But Niemira said that excluding Wal-Mart, its forecast would probably be closer to a gain of just 0.5 percent to 1 percent.

Lazard Capital Markets analyst Todd Slater said July sales results would not be all "doom and gloom, as consumers still seem to be eating and driving.

"This is a big plus for Costco and BJ's ," he wrote in a note. "Consumers are also buying apparel, but trading down to off-pricers like TJX and Ross Stores . We expect the value retailers to report a 4.2 percent comp vs. 3 percent last year."

'Downright Ugly'

Slater said the specialty retail segment, which includes retailers like Gap and Abercrombie & Fitch , looked set to report its 11th consecutive down month, although the estimated decline of 2.4 percent is "less bad" than it has been for some time.

The segment faces easy comparisons with July 2007, when shoppers delayed their back-to-school shopping and some states shifted tax-free shopping holidays into August.

Slater said department store sales might be "downright ugly."

Chains like J.C. Penney and Kohl's have struggled as their middle-income customers overlook purchases of trendy clothes and home decor in favor of necessities. Department stores with a large number of locations in shopping malls are also hurting as shoppers cut down on trips so they can conserve gas.

"Shoppers have increasingly shifted consumption away from discretionary-based retailers toward discounters and off-price chains providing better value and nondiscretionary staple offerings," Retail Metrics president Ken Perkins wrote in a note. "Nowhere has this been more apparent than the divide between discounters and department stores."

Gauging Holiday Demand

Thursday's sales reports will give an early reading on how consumers are spending for back-to-school, the second-biggest shopping season behind the winter holidays. Retailers look to the new school year to get insights into how shoppers might spend during the crucial holiday season.

While the National Retail Federation expects families with children in kindergarten through 12th grade to spend more this year on back-to-school merchandise, it forecasts a 7 percent drop in back-to-college spending, to $599.38 per person.

Niemira said a recent ICSC survey showed that shoppers were starting their back-to-school shopping earlier than a year ago, and there was a "sharp swing" in the number of consumers who said they would go to discount stores to buy school supplies.

Tax rebate checks could be playing a role in getting shoppers into the stores sooner rather than later, he said.

In a bit of good news for retailers heading into the second half of the year, oil prices fell more than 2 percent Tuesday, closing below the $120 a barrel mark for the first time in three months. A dip in gasoline prices could give consumers a bit more spending power heading into the holiday season.