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Posted: October 06, 2009

A lesson in spending

What's the link between back-to-school and holiday shopping?

Bill Greiner

Retailers have had quite a ride since last year's back-to-school season. With consumer confidence low, major department stores and luxury brands have suffered.

As we look to this year's holiday shopping season, it is important to further examine the correlation between back-to-school and holiday spending. Are there historical links between back-to-school and holiday spending?

The answer to the above question is "yes" -- there is a positive historical correlation between back-to-school and holiday spending patterns. From a historical perspective, back-to-school sales and holiday sales share a positive correlation of .76 (for clothing/accessory category) and .60 (for general merchandise).

Both of these measures show strong positive trends, with consumer behavior - be it good or bad - normally carrying over from back-to-school season to the holiday shopping season (data for periods 1992 - 2008).

If that has been the case, what did back-to-school sales trends look like this year? Sales were negative, an estimated 6.1% as compared to back-to-school sales from the previous year. This suggests that we should expect holiday retail sales to be negative this year as compared to 2008.

The First Six Months

While looking to the back-to-school season can be helpful, we have found that it is also important to look at the first six months of the year. For companies with seasonal sales patterns in the retail industry, the correlations between the sales performance during the first six months of the year to each of the back-to-school and holiday sales periods are not as strong.

The year-over-year sales performance over the first six months for those companies was down 6.45 percent, the biggest decline recorded over the last 17 years. Luckily, because the correlation is not as strong, and due to the timing of events in the financial markets over the last year, this holiday sales season may actually turn out better on a year-over-year basis than both the first six months of the year and back-to-school.

Final Word

Lastly, a word should be said about the "wealth effect" of a rising stock market. The stock market is obviously off its lows from earlier this year, and most investors are feeling better about their own financial well-being. This tends to positively effect consumer behavior overall. This trend, if left in-tact through the holiday spending season, may contribute positively towards consumer spending behavior this year.

It is our belief that the 2009 holiday shopping season will fare better than this year's back-to-school shopping season and even though the correlation between back-to-school and holiday sales is strong and suggests a decline in year-over-year sales, we expect that retailers will realize higher profitability this time around.

With the absence of a system on the brink of financial collapse and the anxiety that accompanies that time frame, consumers will have a stronger appetite for holiday shopping than last year, which should lead to a smaller sales decline than was experienced last year. The picture is not completely rosy for all retailers, as we do expect department stores and other high-end shops to suffer from the new frugality that has arisen in the last year.

Bottom line, we believe sales trends will be negative this year as compared to last year, but perhaps not as negative as the trends seen during the back-to-school season.

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Bill Greiner is the president and chief investment officer of Scout Investments, Inc.,a subsidiary of UMB Financial Corporation that offers investment management services for both managed accounts and mutual funds. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

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