Will a Poor Back-to-School Shopping Season Spell Trouble For These Stocks?

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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.

For example, Office Max (NYSE: OMX), and Staples (NASDAQ: SPLS) will suffer from a poor back-to-school shopping season.

Office Max is up 18% to start the year, which is a strong performance in its own right. Meanwhile, Staples 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’ sales fell in 2012 versus 2011, so such a strong rally is particularly surprising given the relatively tepid fundamentals. Staples 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 is close to merging with close rival Office Depot (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.

TJX Companies (NYSE: TJX), which has been firing on all cylinders in recent quarters, could also see some pain from a slow back-to-school shopping season, if parents spend less on clothing for their school-aged children. In the Deloitte survey, those consumers with children in K-8 schooling plan to spend considerably less than they did last year.

The off-price retailer, which operates the Marshall’s and T.J. Maxx brands, recently reported a strong first quarter. Sales and diluted earnings per share rose 7% and 13% respectively, year over year.

As a result, shares now trade for nearly 20 times trailing earnings, a more lofty valuation than the broader market.

Something’s got to give

Rising fuel prices and higher taxes are two weights sitting on the shoulders of the American consumer.

What's more, the U.S. economy, and in particular the employment market, continue to expand at a frustratingly-slow pace.

These stocks have rallied strongly to begin the year, signaling to investors and the market that all is well. The recently released Deloitte survey, however, should make investors sing a different tune. In light of the headwinds facing the U.S. consumer in time for the back-to-school shopping season, Foolish investors would be wise to take a cautious view of each of them. I’m not classifying any of these stocks as outright sells, but at the same time, future gains may be limited, so new investors may wish to look elsewhere for stocks to buy now.

Robert Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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