It’s no secret that the U.S. economy has been slow to recover from the worst recession since the Great Depression. The ongoing sequester, payroll tax hike, and the frustratingly slow-to-improve labor market should have been enough evidence to convince investors that the American consumer is in a tough spot.
Investors have gleefully bought stocks, including those tied to the health of the consumer, over the past several weeks seemingly in pure defiance of the headwinds facing the U.S. consumer. The stock market continues to rally to new all-time highs, so as of now, fears surrounding the health of the consumer have gone unsubstantiated.
Not so fast: a new survey released from professional service firm Deloitte may throw cold water on the idea that the U.S. consumer can defeat all challenges. If the U.S. is in for a poor back-to-school shopping season, will these stocks stand to lose out?
A tepid back-to-school shopping season on the horizon
According to Deloitte, most consumers will significantly pare back their spending on back to school items.
Only 34% of respondents expect to spend more this year, and of those, more than half are only doing so because of higher prices.
Moreover, there are troubling trends when comparing this year’s data to last year. The percentage of families who said they would only buy the necessities increased five percentage points, and the percentage who plan to reuse last year’s items jumped 15 percentage points.
Investors may be quick to dismiss this survey. After all, it’s back-to-school, not the holidays. But that would be a mistake. Many stocks count the back-to-school shopping season among the most important periods of the year.
One area specifically affected would be retailers, and in particular those focused in school supplies and/or clothing for young people.
OfficeMax Inc (NYSE:OMX) is up 18% to start the year, which is a strong performance in its own right. Meanwhile, Staples, Inc. (NASDAQ:SPLS) has rallied nearly 50%, including dividends, to start the year. Clearly, the market has shrugged off any potential lasting damage for these two companies from the ongoing pressure facing the consumer.
Staples, Inc. (NASDAQ:SPLS)’ sales fell in 2012 versus 2011, so such a strong rally is particularly surprising given the relatively tepid fundamentals. Staples, Inc. (NASDAQ:SPLS) is cheap, trading for just 12 times 2012 earnings, but a stock can always get cheaper. Poor sales figures the rest of the year could easily compress the multiple further.
Meanwhile, OfficeMax (NYSE:OMX) is close to merging with close rival Office Depot Inc (NYSE:ODP). The newly formed entity will produce significant synergies in the range of $400 million to $600 million. This combined with further cost savings will help blunt the blow of a slow fall shopping season.