Back-to-school shopping is fun for students—but investors get a piece of the action, too. While the kids are stocking up on fresh spiral notebooks, investors can capitalize on revenue and profits earned in the second-biggest shopping season of the year.
Read on to find out the latest predictions on back-to-school spending, plus five stocks to watch as families hit the stores for school supplies, apparel and technology.
Back-To-School Trends
Last year, families spent $36.9 billion on back-to-school shopping and $74 billion on back-to-college spending, according to the National Retail Federation (NFR). Relative to 2021, the back-to-school spend dipped by $200 million while back-to-college sales volume rose by $3 billion.
For 2023, NFR expects strong spending growth for all student categories this year, from elementary school kids to those who are college-bound. Total projected spending on school-related items is $41.5 billion, while pre-college purchases are expected to reach $94 billion. That breaks down to $890.07 per family with school-age children and $1,366.95 per incoming college student.
NFR expects the increase to be driven by greater demand for computers and related accessories. Some 69% of shoppers intend to buy electronics this year, up from 65% last year.
NFR’s outlook equates to a spending increase of about 13% over the prior year. That’s more than four times the July 2023 inflation rate of 3.2%. A spending boost that outpaces inflation bodes well for ecommerce retailers, department stores and discount stores. These are the three retailer categories that back-to-school shoppers prefer, according to NFR.
NFR’s back-to-school outlook comes from the organization’s annual survey. This year, 7,843 consumers participated.
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A Less Optimistic Outlook
A smaller survey by Deloitte reveals a less optimistic outlook, however. Deloitte surveyed 1,212 parents of school-age children in May. At that time, parents said they’d planned to spend 10% less on back-to-school purchases in 2023. Those shoppers intended to use their inflation-constrained budgets primarily for school supplies—while limiting clothing and technology buys.
What does this mean for investors? Back-to-school shoppers are dealing with higher prices, an uncertain economy and historically high interest rates. Exactly how much they’ll spend will reveal itself, but shoppers are likely to seek out deals in the form of lower prices and cashback rewards. In that scenario, low-price leaders and, possibly, credit card companies stand to benefit.
5 Retail Stocks To Watching During Back-To-School Season
What are the best stocks to buy now? Below are five stocks that should capitalize on back-to-school deal hunters. Three of them are pure retail stocks, one is a tech/services/retail hybrid and the last is a tech/financial hybrid that benefits from higher retail sales.
You may also like our coverage of best EV stocks and best industrial stocks for 2023.
Note that the key metrics bulleted below are from Morningstar.
Walmart
Walmart key metrics:
- Trailing 12-month diluted EPS: $4.15
- Net income three-year growth: -7.8%
- P/E ratio: 30.5
- Debt/equity: 0.77
- Forward dividend yield: 1.5%
Walmart earns a spot on this list for the speed and strength of its back-to-school (BTS) campaigns. The mass retailer began BTS promotions in July, advertising classroom supplies and backpacks at 2022 prices.
The store also carries clothes, electronics and dorm-room necessities, making it a one-stop shop for back-to-school and back-to-college shopping. This, combined with Walmart’s price-leader reputation, will drive families through the door. The company may also see gains in its Sam’s Club chain from shoppers looking for the lowest prices on tech and apparel.
Walmart’s second quarter 2024 earnings release included a fiscal year 2024 sales growth guidance of 4% to 4.5%. The company’s consolidated operating income growth guidance is 7% to 7.5%.
The consensus price target on Walmart is $176.35, which represents an upside of about 10.5%. Analysts from Citigroup, Morgan Stanley, Truist Financial and UBS Group raised their price targets for the retailer in August 2023.
Five Below
Five Below key metrics:
- Trailing 12-month diluted EPS: $4.77
- Net Income 3-year growth: 14.3%
- P/E ratio: 37.6
- Debt/equity: 0.94
- Forward dividend yield: NA
Five Below specializes in novelty accessories, clothes, craft and school supplies and tech accessories—with many items priced $5 or less. Consider this store a cooler version of a dollar store that caters to tweens and teenagers.
Five Below stores are commonly found in outdoor malls, surrounded by popular stores like Target and Ulta Beauty. Relative to dollar stores, which are often situated in less central locations, FIVE is an easy shopping destination for families in search of bargains.
FIVE’s P/E ratio is higher than Walmart’s, but the chain has a solid track record of sales and earnings growth. The company’s most recent earnings release included a fiscal year 2023 comparable sales growth guidance of 1% to 3%. The net income guidance for the year is $297 million to $319 million. Net income in the prior year was $261.5 million.
The consensus price target on FIVE is $215.36, which implies 17.75% upside.
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Amazon
Amazon key metrics:
- Trailing 12-month diluted EPS: $1.26
- Net income 3-year growth: NA
- P/E ratio: 105.7
- Debt/equity: 0.82
- Forward dividend yield: NA
Amazon is the leading online ecommerce destination. It’s also a place people shop when their local stores have empty shelves or in-store prices seem too high. As well, many parents of college kids default to Amazon as the easiest way to send supplies to students who’ve just moved away from home. For those reasons, Amazon is sure to win a piece of BTS spend.
With its high P/E ratio, Amazon is obviously no value play. But the e-tailer and tech company does know how to grow its topline sales (even if net income can be inconsistent). Amazon expects third quarter 2023 sales to grow 9% to 13% year over year. That guidance includes a favorable foreign exchange impact. The e-tailer’s third quarter operating income guidance is $5.5 billion to $8.5 billion, which would double or triple the prior year’s result of $2.5 billion.
Analysts see nearly 20% upside in Amazon stock, based on the consensus price target of $160.87.
Costco
Costco key metrics:
- Trailing 12-month diluted EPS: $13.50
- Net income 3-year growth: 16.9%
- P/E ratio: 39.7
- Debt/equity: 0.38
- Forward dividend yield: 0.8%
Costco is another popular source for discounts on clothes, tech and school supplies. The club is also promoting memberships for college students, so it can capitalize on $1.50 hot dogs and other bargains while they’re away from home.
Costco’s dividend is weak relative to Walmart’s, but there is a strategy in play. Costco is committed to expanding its footprint and gaining market share—objectives that historically have served the company well. That leaves less cash for shareholders in the short term, but sets Costco up for continued, long-term growth.
Costco doesn’t provide guidance, but analysts expect the club store chain to grow sales 6.1% and generate EPS of $14.06 in fiscal year 2023. Costco’s fiscal year ends in August.
The consensus price target for Costco is $562.67, which equates to 3.7% upside.
Visa
Visa key metrics:
- Trailing 12 month diluted EPS: $4.15
- Net income 3-year growth: 7.4%
- P/E Ratio: 30.9
- Debt/Equity: 0.53
- Forward Dividend Yield: 0.8%
Visa makes more when payment volume across its platform increases—no matter what’s prompting the increase. So greater spending, higher prices, an ongoing shift to cashless payments and shoppers looking to leverage cash rewards on their credit card are all good trends for this high-margin payment processor.
Visa also pays a conservative dividend and regularly buys back its shares.
Analysts expect Visa to deliver EPS of $8.67 for the fiscal year ending September 30, 2023. The prior-year EPS was $7.50. The consensus sales estimate for the year equates to 11.3% growth.
Visa’s consensus price target is $273.95, which is up about 12% from the current stock price.
Bottom Line
Here’s the bottom line. BTS is a critical season for retailers that sell school supplies, apparel and tech. Though there are differing outlooks on how much back-to-school shoppers will spend, families are likely to seek out bargains. The best stocks to buy now might be those low price retailers that will reap the rewards.
Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.
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