What’s in store for back-to-school spending? 

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Matt Boss: Historically, back-to-school sales have given a very strong indication to overall fourth quarter and holiday. And we do believe that we will continue to see this low single-digit growth as we move through the back half of the year and into the fourth quarter and holiday.

Amanda Douglas: The back-to-school shopping season is one of the most important times of the year for both retailers and consumers alike. Are shoppers finally loosening their purse strings or are they continuing to be price-conscious? And what strategies are retailers deploying to boost sales? I'm Amanda Douglas and I'm part of the Department Stores and Specialty Softlines research team here at J.P. Morgan. Today I'm joined by my colleague, Matt Boss, head of both J.P. Morgan's Retail and Department Stores and Specialty Softlines team and leisure sector coverage, and we're here to discuss what to expect for back-to-school sales in the U.S. this year. Matt, thanks so much for joining us today.

Matt Boss: Thanks for having me, it’s great to be here.

Amanda Douglas: So, maybe to start, Matt, can you walk us through the overall retail landscape in the U.S. as you see it? Are you seeing consumers finally loosening their purse strings or are they remaining cautious in light of slowing economic growth?

Matt Boss: So, it's a great question. Across the discretionary backdrop today, I think what you're seeing is consumer concentration. It's very clear to me, it's consumer concentrating rather than slowing. You're actually seeing this translate into two different behavioral methods. First, we're seeing the consumer concentrating toward shopping during key catalyst and holiday periods. So, you're seeing higher peaks of spending during catalyst periods such as Christmas and back to school, but then you're also seeing greater lulls during transitional or in-between periods. I would say, this represents a continued theme that we've seen over the last 12 months. In fact, when we dig deeper into Chase credit card data, consumer spending during catalyst and holiday shopping periods over the last 12 months has outperformed these transitional periods and months by about 150 basis points on average.The second point that I would make is, I think the consumer is concentrating to retailers and brands that have delivered on a clear value proposition for the consumer. I think this is increasingly important to draw in a consumer for brick-and-mortar retail following the post-pandemic share shift that you saw towards e-commerce. As you think about the consumer, they need that value to support that brick-and-mortar effort relative to the convenience that e-commerce offers. And so, you're seeing, in my opinion, a real dichotomy of who delivers that value proposition at brick-and-mortar in terms of clearly winning versus those that can't that I think are very much struggling. Lastly, I'd say that the other dynamic at play is, when we think about different income demographics for the consumer, we've coined today's setup as a selective recession. So, I actually think the consumer is and has been in a recession, but it's very different across the different income demographics. J.P. Morgan economists point to $40 trillion of wealth creation for the high-income consumer, and that makes up roughly 40% of total consumer spending, while the lower 20% of consumers only make up roughly 10% of consumption, and that's where I think the real pressure point stands. It's that lower 20% of the consumer cohort where the cost of living is impacting their ability to spend on discretionary categories. We've actually done survey work on this, and roughly 70% of consumers at the low-income demographic today would cite that their current savings is insufficient to cover their cost of living. So, the way we kind of shape up the landscape would be, the days of pricing without product improvement is over. That's a clear theme that we're seeing across both retailing and leisure, and the outcome of that is that you're seeing consolidation at brick-and-mortar, and I think that's really tied to this zero-sum game at retail and the involving definition of convenience, which makes value paramount.

Amanda Douglas: That's helpful on the overall retail landscape. And as you think about the back-the-school shopping season in particular, what are you overall forecasting for sales to look like this season, and how do you see back to school for retailers and consumers?

Matt Boss: Yeah. It's extremely topical. So, as we look at the backdrop, back-to-school sales for U.S. apparel and footwear, we forecast to grow low single digits this year. And if I take a step back, that roughly 2 to 3% growth rate on consumer spending is exactly commensurate with what we've seen over the last several catalyst periods for consumer spending really over the last 18 months. And again, to me, this points to a concentrating rather than slowing consumer backdrop. When we take a look, for example, near-term at- at May and June, we saw roughly 2 to 3% spending growth, and that coincides with Mother's Day and Father's Day. That actually compares very favorably to March and April, around that spring and Easter seasonal catalyst, where we saw consumer spending within our Chase credit card data very similar, in that 2 to 3% growth rate. And if you look back at Christmas and holiday last year, again, spending growth was also in that 2 to 3% range, which points to consistency and points to a very resilient consumer backdrop over that last 18 months. So, overarching, I'd characterize spending during these catalyst periods, which would include this year's back-to-school, as very consistent, low single digits, up 2 to 3% range. It's the in-between periods that I was citing or the transitional periods such as July where we're seeing this consumer concentration impact, and that's where I think you're seeing consumer spending that does moderate when there is not a catalyst to spend. Now, again, I think you do need to look through, particularly near-term, and- and we've coined some of the transitory impacts that I think you saw exiting the second quarter and July as more transitory. I think you had CNN effect and media effect around the assassination attempt, around the change in presidential candidates, and the Olympics year over year, weather it was unfavorable, the level of clearance inventory in that clearance inventories in the channel are very clean today, all were more transitory and negative impacts in the month of July. But so far, we've seen a very positive initial trend for back-to-school. And that's what we're seeing right now in August. We're seeing it start in the south with earlier back to school, and now we're seeing it translate into the northeast in terms of accelerating traffic trends at brick-and-mortar with back-to-school categories.

Amanda Douglas: And are there any trends you're seeing across back-to-school sales, and are retailers doing anything differently this year, in your view, to attract shoppers?

Matt Boss: One of the trends that we're seeing this year for back to school is a more clear emphasis on newness and really an amplification of value from apparel and footwear retailers. Brands like Abercrombie, Hollister, American Eagle entered the back-to-school season with a very distinct marketing and merchandising strategy across both men's and women's. And at the category level, across denim, tops, and non-bottom tops, as well as dresses and active wear, I'd say if you take it a leg deeper by category, denim would be the particular category of trend right now. That's where we're seeing a head-to-toe denim fashion trend and fabrication extending not only to the bottoms, but also to tops, jackets, and even accessories including handbags and shoes. So, I do believe that there's an underlying denim trend and denim cycle from a fashion element. I think what's enabled this focus on newness, particularly across the specialty apparel and- and global brands, it's really how healthy inventory levels are today entering this year in the channel. And if we think about that from a year-over-year basis, inventory growth still today is roughly 100 basis points above sales growth, but that inventory growth entered the year 600 basis points below sales growth or a 700 basis points reversal relative to a year ago. So, broadly, in particular, specialty retail, we see a much more rational promotional backdrop. I think the other theme that I- I mentioned before would be value. And if I look across the landscape, one of the more strategic changes this year that retailers are making is an increased focus on value and quality of their product offering and really amplifying the marketing message to consumers more so around the quality, the make, the innovation, and the newness rather than just emphasizing price, markdowns, and discounts.

Amanda Douglas: As we wrap up the podcast today, Matt, do you think strong back-to-school sales are a positive sign for the wider economy?

Matt Boss: So, historically, back-to-school sales have given a very strong indication to overall fourth quarter and- and holiday. And we do believe that we will continue to see this low single-digit growth as we move through the back half of the year and into the fourth quarter and holiday. Very consistent with last year, very consistent with back-to-school trends that we're seeing today, and again, very consistent with that concentrating consumer theme where the consumer is coming out for peak shopping periods where there is a catalyst to spend. And to be clear, we're not saying that there's strength across every retailer out there. What we just walked through, it's very clear that it's not just the consumer concentrating towards events and peak shopping periods, but they're concentrating towards retailers, global brands, and leisure companies that are delivering that combination of value proposition as well as convenience element. That, to me, is a sign that consumer is choiceful today and gravitating to retailers that are offering them the ability and the need for that value as well as convenience element.

Amanda Douglas: Matt, thank you for the time. I appreciate the points you raised around a concentrating consumer rather than slowing, especially as we think about the back-to-school season where you're seeing trends on denim, the amplification of value and newness, and continued market share gains across off-price retailers.

Matt Boss: Thanks so much for having me. Look forward to joining again.

Amanda Boss: And thank you to our listeners for tuning in to Research Recap on J.P. Morgan's Making Sense podcast. We hope you join us again next time.

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