Tariffs are a wrinkle in back-to-school shopping. That's why we like these 3 retail stocks

CNBC

2 days ago

The back-to-shopping season, a crucial time of the year for retailers, is being muddied by tariffs and budget-conscious consumers. That backdrop has forced retailers to get creative to protect margins while shoppers hunt for deals on clothes, dorm-room decor and more. Tariffs are front and center. Just over half of respondents to UBS's back-to-school survey last month cited elevated import duties as a top economic concern, behind only inflation. The result is "lackluster" consumer spending intentions, according to UBS. Based on its survey data, the firm estimated that spending on clothing, shoes, and accessories will decline 2.3% year over year. That's in line with a forecast from the National Retail Federation . The trade group predicted that families with students in elementary through high school will spend an average of $858.07 on clothing, shoes, school supplies and electronics — about 2% less than 2024's $874.68. Parents started their shopping earlier than normal, the NRF's survey found, with a majority of those saying they are doing so specifically out of concern that prices would rise due to tariffs. The behaviors described in these surveys don't necessarily signal that the U.S. consumer is collapsing. In an interview, Morgan Stanley retail analyst Michelle Weaver said she is "seeing the health of the consumer weaken but it's not outright weak," pointing to mixed data points. The July retail sales report showed "pretty robust" spending activity, Weaver said, rising 0.5% for the month after an upwardly revised 0.9% gain in June. At the same time, during the latest earnings season, Weaver noted many consumer-exposed companies in the restaurants and staples industries reported poor sales growth and value-seeking behavior. This dynamic is occurring against a backdrop of creeping inflation, albeit at a slower pace. Consumer sentiment in August fell for the first time since April as inflation expectations rose, the University of Michigan's closely watched monthly survey found. However, for value-oriented players like Club names TJX Companies , Costco and Amazon — all known for their pricing flexibility — the tariff and inflation picture could drive traffic as consumers seek ways to stretch their budgets. For retailers more broadly, though, this dynamic may mean tighter profits if they avoid passing through costs to already-pressured consumers. Many retailers are reporting earnings this week, including TJX and Target on Wednesday and bellwether Walmart on Thursday. Tariffs are beginning to show up in consumer prices, even if the overall headline inflation numbers haven't deterred Wall Street from betting on a Federal Reserve rate cut next month. The June inflation data "clearly showed the start of tariff-driven inflation," Weaver said. For example, apparel prices rose 0.4% in that month's consumer price index report, while household furnishings were up 1%. In the July CPI report, which was released last week, household furnishings saw a 0.7% gain — though apparel increases moderated, up just 0.1%. In general, Weaver warned that the the trend could continue throughout the year as the full effect of tariffs unfolds. This makes "a challenging environment for both the consumer and consumer companies given that they're now getting hit with tariffs," Weaver noted. To blunt the impact of tariffs, Weaver said retailers are leaning on a range of mitigation strategies. First is pricing power but "companies aren't likely to pass 100% of the cost of tariffs to consumers." Beyond pricing, she highlighted stockpiling inventory ahead of tariffs, diversifying supply chains and negotiating with suppliers to share the burden. Now let's zoom in on three Club retailers that count on the back-to-school period to drive sales. Costco Costco stands out as a retailer that has embraced all these strategies to address the tariff risk. Historically, the company is known for pressing suppliers to cut prices before considering passing costs on to consumers. If suppliers don't play ball, Costco can choose to put more of its private label Kirkland Signature brand on its shelves instead. Leveraging Kirkland is an important lever for the company because it comes with better margins and allows Costco to control more its supply chain. On its latest earnings call in late May, management highlighted additional tactics, including sourcing inventory from other countries not subject to tariffs, leverage its global footprint to reroute products sourced from countries exposed to tariffs, and pull forward inventory purchases on items such as sporting goods, allowing it to hold prices or only increase them slightly. These measures have helped the business maintain momentum during a challenging operating environment for retailers. Indeed, its monthly sales reports have continued to show strength across categories despite a tougher retail backdrop. TJX Companies For TJX, the off-price model itself functions as a built-in defense against tariff pressures. As Telsey Advisory Group's Dana Telsey wrote in her back-to-school 2025 outlook, discount formats are set to "dominate expected BTS shopping." She added that off-price retailers like TJX are positioned to keep capturing share as shoppers trade down "in search of value and secondhand options amid ongoing macro caution." That's because TJX's flexible and opportunistic buying model allows it to absorb cost pressures while still offering branded goods at steep discounts compared with what a full-price retailer offers. Telsey maintains a buy-rating on the stock with a $150 price target. UBS echoed that optimism in a separate preview note, forecasting "solid sales momentum" and an earnings beat when the company reports fiscal second-quarter results Wednesday, along with the potential to raise guidance. "Not only do we expect TJX to take major share from department stores, but also we believe TJX should benefit from the disruption tariffs may cause for US retailers" in the second half of 2025, UBS wrote. The firm reiterated its 12-month buy rating on TJX and a price target of $164 on the stock. Amazon One of the most popular destinations for back-to-school shopping this year is online retailers, favoring Amazon's colossal e-commerce marketplace, per the NRF. According to the firm, many back-to-school shoppers planned their purchases around the retailer's discount-heavy Prime Day in July, which ran four days this year instead of 48 hours. In its survey work, Telsey similarly found that the vast majority of respondents were looking to find school supplies on sale — and data suggests they did just that. July Prime Day proved to be a huge early back-to-school shopping opportunity, with sales of school supplies, including backpacks, lunchboxes, binders and kids apparel, up a massive 175%, according to Adobe for Business . The internet category is "ready to capture shares during the back-to-school shopping season by highlighting value-focused school essentials and discretionary products," wrote Telsey. Amazon's appeal isn't just pricing, but also its speed. The combination of competitive deals and fast delivery enables students to grab essentials early with convenience. That's why Telsey believes Amazon "should continue to gain share ... given the timing of its Prime Day, combined with the leverage of Prime members data over a wider selection of products, and faster fulfillment." Bottom line Back-to-school spending may look softer on the surface this year, but this environment is still creating winners among retailers. Rising tariffs and shaky consumer sentiment are pressuring households, prompting them to shop earlier and hunt for deals to make their dollars go further. For investors, this means value players like TJX, Costco and Amazon stand to capture more dollars from parents who prioritize affordability. With tariff-driven inflation still filtering through, we are staying selective in our retail exposure, leaning toward companies that can both protect their margins and delivery value to cost-conscious consumers. TJX, Costco and Amazon check those boxes. (Jim Cramer's Charitable Trust is long COST, TJX, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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