Thrifty consumers are hitting the stores for back-to-school shopping knowing they’re going to spend more due to higher prices, and are picking retailers where they can stretch their dollars. “Consumers continue to face headwinds of rising rates and student loan moratorium expiration, but still healthy balance sheets, rising real wages, and a resilient labor market means consumers maintain buying power,” Morgan Stanley analysts wrote in a recent research report. The firm’s early read on the second busiest shopping season after the holidays anticipates stronger sales than this time last year, but it expects totals will be in line with pre-pandemic trends. Back-to-school spending is expected to reach a record-high of $41.5 billion, according to the National Retail Federation’s annual survey . That’s up from $36.9 billion last year and the previous high of $37.1 billion in 2021, the trade group said. Meanwhile, the group forecast back-to-college spending will hit $94 billion, a new record. Persistent inflation is one factor pushing sales higher, according to Jefferies. It recently surveyed nearly 600 U.S. consumers with children in elementary through high school, or college. About 43% of the parents had children in pre-secondary school, 30% had children in college, and 28% had children in both. Three-quarters of survey respondents said they are likely to spend more on private label items this time around, with a slew of big-box retailers appearing to be this season’s winners. They are planning to spend more on apparel, school and office supplies, and accessories, with higher-income consumers willing to spend more this year, benefiting a small group of specialty apparel stores, Jefferies said. The trends suggest certain retailers will fare better than others, with analysts favoring these stocks for back-to-school. Bargain hunting Stores such as Walmart , Target , Costco and Dollar General are among the value retailers that stand to gain as consumers hunt for cheaper alternatives, like private label products, according to Jefferies. Walmart is poised to get a large share of the spending, with 31% of the consumers Jefferies polled saying they plan to do most of their back-to-school shopping at the discount retailer. WMT YTD mountain Walmart shares year to date. “We see [customers] buying more private brand items and they’re buying more grocery staples and in-home meal options consistent with eating at home. … They’re looking for value,” Walmart’s CEO Doug McMillon said during the retailer’s second-quarter earnings call in August. “We see people across income cohorts come to us more frequently looking to save money on everyday needs.” The stock is up nearly 15% this year, as of Thursday’s close. About 82% of analysts covering the stock rate it an overweight with an average target price of $178, according to FactSet. That implies more than 9% upside from its current levels. Amazon is taking a similar share, with 31% of survey respondents picking the dominant e-commerce channel as their go-to. Jefferies said Amazon’s “unmatched” product assortment puts it in a sweet spot. It’s especially well-positioned to gain market share in dorm decor and bedding, with 40% of survey respondents saying they plan to flock to the e-retailer for those goods. Competitors like Swedish retailer Ikea and TJX-owned Homegoods received substantially less enthusiasm. Fashion still matters The SPDR S & P Retail ETF is up 6% this year, buoyed by strong gains from its holdings, which include Hollister-parent Abercrombie & Fitch , American Eagle Outfitters and western apparel retailer Boot Barn Holdings . For shoppers with more cash on hand, analysts think the top beneficiaries will be specialty apparel options such as American Eagle and Abercrombie — the latter being the favorite of Jefferies and Morgan Stanley for back to school. Abercrombie has popped more than 130% this year. The retailer crushed Wall Street’s earnings and sales expectations for the fiscal second quarter. About a third of analysts rate the stock overweight, according to FactSet, and the stock’s average target price of $57 suggests shares could add 7% from Thursday’s close. Morgan Stanley also likes Foot Locker , Anthropologie, Banana Republic and Nordstrom . But it expects Kohl’s , Hollister, American Eagle and Victoria’s Secret may have some risk to the downside. Shoppers are spending less on footwear, analysts said, so fashion trends may differentiate the winners. According to a Stifel survey, retro basketball styles from Nike were the most popular choice for back-to-school this year. However, it did see its popularity slip from earlier this year. Nike, which is expected to report earnings later this month, recently notched a record 10-day losing streak and has lost nearly 13% this year. NKE YTD mountain Nike shares year to date. The stock has an average target price of $126, which means shares stand to gain 24% from the close on Thursday. Foot Locker shares are also having a tough year, down 48% year to date. The company recently reported declining sales and reduced its outlook due to a slowdown in spending among lower- to middle-income shoppers. Footwear brands like New Balance, Deckers -owned Hoka and On Holding are eating into Nike’s market share, according to Stifel. On Holding shares have popped nearly 68% this year, while Deckers has added 32%. Gains from these retailers are notably driven by female consumers, Stifel said. Not a ‘blowout’ number Although shoppers are looking to value retailers to save, the tide isn’t helping all names. T.J. Maxx , Dollar General and Walmart have focused on product quality. “These retailers have invested significantly in their private label assortments in recent years and continue to grow penetration,” Jefferies analysts wrote in an Aug. 28 note. “We believe consumers that shift to private label offerings as an alternative to higher priced brands are very likely to become stickier shoppers, driving increased engagement and share gains.” Shares of TJX, which owns T.J. Maxx and Marshall’s, have gained 16% year to date. Analysts surveyed by FactSet expect shares to rise nearly 7% to an average target price of $99. DG YTD mountain Dollar General shares year to date But Dollar General shares plunged 12% on Thursday after missing earnings estimates and offering up a weak forecast for the year. The retail chain has been hurt by rising theft and shoppers increasingly prioritizing essentials. To be sure, Morgan Stanley analysts noted that while back-to-school shopping this year is looking stronger than last year, it may not be a “blowout” number. “August discounting activity worsened more so than our historical data suggests, which could suggest a slower BTS season,” the firm wrote in an Aug. 29 note. That could be a warning sign for the holidays as many investors look to back-to-school sales to set the tone for the winter season.
