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For Big Retailers, Back-to-School Success or Back-to-the Drawing Board

The back-to school shopping season is now at full-throttle and as crucial as ever to retail revenues. Historically, the months between August and January account for more than 50 percent of full-year sales and this year the period will hit a staggering $72.5 billion in consumer spending, according to the National Retail Federation (NRF). Only the Christmas holidays trump the frenetic sales bonanza that stretches over the late summer.

And as a testament to the significance of the back-to-school season, and an anemic economy, retailers are now expanding the period to include July as well. Especially since the NRF anticipates that families will spend 7 percent less than they did last year, every day counts. Teen oriented retailers like Abercrombie and Fitch (ANF) and American Eagle Outfitters (AEO) have experienced some success with the protracted season offering seep discounts on virtually all their product lines.

AEO is a paradigmatic example of an apparel retailer that customizes its entire business strategy around the back-to-school season. They typically suffer from a laggard spring which accounts for approximately 20 percent of their yearly sales. This year has been particularly underwhelming with revenue dragging 4 percent behind Wall Street’s already modest estimates. However, the back-to-school season could account for as much as 60 percent of their total year’s haul and, if brisk enough, could propel them into a successful winter holiday push.  Still, AEO needs to generate about an extra $1 million a week for the remainder of the year just to satisfy the meager earnings estimates analysts have tagged them with.

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Since the stakes are so high, the competition among retailers is particularly fierce and every one of them has adopted their own, idiosyncratic strategy to squeeze the season for everything its worth. For some, a profitable late summer might be the last fence between their assets and bankruptcy proceedings.

Take JC Penney as an example. The numbers for the last fiscal year were dim; Penney lost $985 million, or $4.49 per share, compared with a loss of $152 million, or 70 cents per share, in the year ended January 28, 2012. The company’s revenue fell 25 percent, to $12.98 billion, from the previous year’s $17.26 billion.

JC Penny’s stock has plummeted more than 60 percent, and credit agencies downgraded the company, once a benchmark of retail success, to junk status. After only eighteen months on the job, once heralded CEO Ron Johnson was given his walking papers. Now the retail behemoth is taking a massive gamble that the launch of a new line, Joe Fresh Kids, will revitalize their business heading into the new school year. Betsy Schumacher, senior vice president of children’s apparel noted optimistically, “I think it’s a great story and a great new fashion. I think we’re going to see really exciting traffic from this.”

After several years of bleeding formerly loyal customers, JC Penney is returning to its old strategy of courting shoppers with bargain basement discounts and showy promotions. The emphasis on more exclusive brands and higher price points in an attempt to woo higher income consumers went out the door with Johnson.

Macy’s, however, is continuing its emphasis on millennial shoppers, consumers aged thirteen to thirty. The millennial consumer group is increasingly targeted by retailers worldwide since the demographic spends more than $65 billion a year. More than other age groups, they are keenly interested in new trends but also sensitive to value as well.

Molly Langenstein, executive vice president of millennial and new business development, said, “Throughout 2013, Macy’s has continued to invest in exclusive brands to engage millennial shoppers who are looking for diverse, current and trend-forward fashion.”

To this end, Macy’s is launching two new brands. One brand, “Maison Jules,” is aesthetically inspired by Parisian street fashion and will distinguish itself with “unique patterns and modern prints” that feature colors like peach and yellow paired with more subdued tones like navy and burgundy.The other brand, “QMack,” takes its stylistic bearings by youthful American fashion trends, and will include preppier items like cardigans, blazers and roll-sleeve blouses.

Like JC Penney, Sears needs a good back-to-school season as a tonic to its persistent underperformance. The once dominant retail dynasty has been suffering since the 90’s,  and profitability has plummeted since the beginning of Lampert’s reign, with sales down $10 billion and stock devalued by 64 percent. Sears’ cash reserves have been depleted to an historic low. Rumors of massive asset sales to avoid bankruptcy persistently haunt the company. Sears’ most recent financial report disclosed a 9 percent dip in revenues with a $279 million loss, with same-store sales down 3 percent this quarter.

Sears’ strategy hinges on exploiting its full range of omnichannel capabilities, seamlessly integrating its traditional brick-and-mortar business model with online click-and-order efficiency. For the first time ever, Sears will be offering its patrons “eCoupons,” or electronically issued coupons that are redeemable in stores. They’re also trying to incentive customers by streamlining the whole shopping experience, allowing them to buy merchandise online and pick it up in the store, or even text their location in the parking lot to Sears and have them bring their product right to the car. A recent Consumer Report study showed that 86 percent of Sears’ customers complained of a unsatisfying shopping experience. Maybe Sears can turn it around with drive-thru service.

Normally, the season’s fiscal results wouldn’t be available until the November earnings reports but since this year’s back-to-school season has been extended to include July, prior to the quarter’s end, everyone should know who the winners and losers are well before that.

Also, the season is absolutely central to each company’s attractiveness to potential investors. Those who bet on a robust back-to-school season are often rewarded handsomely but don’t stick around for the duration. The inherent cyclicality of the retail fiscal year has a tendency to discourage long-term holdings, making it that much harder for retailers to raise capital. Given an unforgiving economy, wary consumers and a few successive years of uninspiring returns, it’s no longer good enough to just have a strong back-to-school season. Ailing retailers like JC Penney and Sears need big enough scores that they can generate momentum heading into Christmas, transforming their currently gloomy future prospects. Otherwise, back-to-school ends with back-to-the-drawing board.