Back-to-school may lift U.S. retail shares after recent lull

​Strong late-summer back-to-school sales could provide U.S. retailers some needed momentum after many sector shares lagged the broader market in recent months.

The S&P 500 retailing index, which includes Amazon.com Inc, is up just about 2% for the quarter so far, compared with a 6% gain in the S&P 500.

Some retailers, including Macy's Inc and Walmart Inc, cited upbeat back-to-school data recently as they increased annual U.S. sales forecasts, but further sales data and the U.S. August retail report are expected later this month.

With the help of advance child tax credits and stimulus checks related to the pandemic, some consumers have had extra cash to load up on backpacks and other supplies.

Most U.S. schools are returning this year to in-class instruction after months of remote learning. New York City's public schools reopen Sept. 13, and many New York metro area schools begin in the days after the Labor Day weekend, when parents typically continue to pick up school supplies.

Retail shares along with some other value-related sectors tied to the economy have underperformed growth sectors in recent months, said Phil Orlando, chief equity market strategist at Federated Hermes, in New York. The S&P value index is up about 2% for the quarter, while the growth index is up more than 8%.

But that trend is likely to change, and retail is among the groups that will "catch a second wind here and run through the end of the year ... into the beginning of next year," he said.
Holiday sales and back-to-school sales have a strong correlation, he noted.

Investors have been optimistic about back-to-school sales given the comparisons with last year, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

"I don't think there's any question that back-to-school is going to be far stronger than last year," he said.

"That's been somewhat factored into expectations," he said, noting that retail stocks are still higher than six months ago.

Also, supply chain issues could be a drag for some retailers, said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.

"Our operating assumption is that it doesn't get worse. ... They are working hard on the supply chain to get products on the shelf," he said.

Shares of some bigger retailers have outperformed, so investors may need to look for bargains, Kuby said.

"We haven't sold any (retail shares) ... but our favorite pick in the retail area is Target, and that's a great stock but it's not inexpensive," he said.

Target Corp shares are up about 39% for the year to date, compared with about a 14% gain in the S&P 500 retailing index over that same period.

Shares of products-related companies might have more room to run, Kuby said, such as ACCO Brands Corp, which his firm owns.

"Investors' attention will pivot more to holiday sales," he said. "That's where focus is going to be."