Byline: Curt Hazlett

What's in fashion for back-to-school shoppers? Mostly the same styles as last year - clunky shoes, peasant shirts, jeans that look older than the kids buying them. But at least one thing in the nation's malls and shopping centers this summer wasn't there a year ago.

Optimism.

There are signs, faint but growing, that American consumers are ready to spend again during this crucial back-to-school season - and could give retailers something they haven't seen for a while: a strong fourth quarter. "With consumers heading back to the stores for everything from scissors to sneakers, retailers are hopeful that the back-to-school season will signal the beginning of an economic recovery," says National Retail Federation President and CEO Tracy Mullin. NRF expects $14 billion in seasonal sales.

Mall owners and even long-suffering retail executives are feeling more upbeat, not just a good sign for back to school, but a harbinger for months to come. Analysts at UBS, for example, predict a 6 percent to 6.5 percent rise in holiday sales this year, compared with an 11 percent decline last year.

"We're about to hit the sweet spot," says Carl Steidtmann, chief economist at Deloitte Touche, on a recent conference call "I'm very optimistic that this will be the best holiday season of the millennium."

The optimism is shared by mall owners. At Simon Property Group, the nation's biggest owner, Michael McCarty, president of Community Centers Division, agrees that back-to-school is "an early warning sign" for the holidays, and so far he hasn't seen any cause for alarm. Indeed, he says, mall traffic is trending upward and average expenditures are rising.

Shoppers seem encouraged by a perception that the economy is heading (albeit slowly) back to normal. Much of the uncertainty over war in Iraq has passed and companies are beginning to report healthier earnings. And, even though unemployment remains high, the stock market's renewed ability to go somewhere other than down points to stronger earnings - and maybe even hiring.

"The economy is not robust, but it's more stable than it was, and that tells me that back-to-school will be better than it was last year," says Wesley Wright, a founding partner of Diversified Retail Solutions, a retail consulting firm based in Bentonville, Ark. "I would expect it to be much more solid."

That wouldn't take much. The 2002 back-to-school season flunked, having failed to live up to even the mediocre expectations that had been set for it. Department stores and specialty retailers had an especially rough go of it. Same-store sales at Federated Department Stores fell 5.8 percent last August, for example, while those at Gap Inc. dropped 2 percent. At Sears, the August drop was even more precipitous, with same-store sales down 11 percent, in part because of double-digit drops in apparel sales.

Back-to-school is retail's second most important season, right behind the year-end holidays. The nation's school year starts at widely differing times - from early August in parts of Florida, for instance, to the second week of September in New York City - and the shopping season is equally broad, beginning in late July and extending to the end of September.

As everyone knows by now, last year's weak late-summer numbers set the pattern for the rest of the year. The cheerless holiday season was marked by slow store traffic, heavy promotions and weak earnings for retailers.

So, good news in August could point to happy holidays ahead. "Back-to-school is a very, very good indicator of the holidays," says Marshall Cohen, senior industry analyst with The NPD Group, a market information company. "The economy doesn't change that fast in today's society, and I believe it's going to be a clear indicator of what's going to come."

Cohen is confident that back-to-school will be strong. "It looks like the consumer is starting to traffic the mall more," he says. "This was a repressed spring, but summer's finally here. That psyche puts people in the spending and buying mode. This same time last year, the malls were very quiet."

Recent statistics certainly point in that direction. Consumer spending rose slightly in April and May, and the University of Michigan's June Consumer Sentiment Index, while down from the post-war levels of May, nevertheless showed a growing inclination to spend.

In May, an NPD survey found that 14 percent of consumers planned to spend more than usual on apparel during the next three months, up from 11 percent in a survey before the Iraq war.

The optimism about spending is being echoed in retailers' front offices. The Retail Sector Performance Index, compiled each month by the National Retail Federation and the Bank of Tokyo Mitsubishi, reached its highest level in June since the survey began almost a year ago. The index measures the current assessment of industry executives on metrics such as sales volume, traffic, average transactions, employment and inventories, and polls them on their sales outlook for the next six months. Another part of the survey - the Demand Outlook Index, a six-month sales outlook - also rose to its highest level ever.

The NRF itself is forecasting a substantial jump in general merchandise, apparel and furniture sales in the second half - a gain of 4.5 percent, up from 2.2 percent in the first half. Projected increases of 4.3 percent in the third quarter and 4.7 percent in the fourth would bring the year's gain to 3.5 percent, the federation says. NRF Chief Economist Rosalind Wells says the improvement will be driven in part by "pent-up demand for apparel, provided weather and styles cooperate."

The optimism over back-to-school sales may stem in part from the industry's efforts to put its house in order. Analysts say retailers are in a better place than they were a year ago, with inventories under control and a bigger emphasis on current merchandise, both of which should help them resist the rush to promote. "Last year retailers panicked very early," says Cohen. "Jeans and footwear were really abundant. By Aug. 15 there were sales everywhere."

Delia's, a hot brand in girls' apparel, is but one example. Last August, the company, citing "planning miscues," took "austere steps" to reduce excess inventory, and then staff. It posted a loss of nearly $11 million for the September quarter.

Such bad results will have at least one positive result. This year's season will be helped by the simple fact that retailers are "up against some really bad numbers from last year," Cohen says.

Retail consultant Britt Beemer says he saw it coming. A year ago his firm, America's Research Group, surveyed 800 people and found a collective yawn when it came to back-to-school shopping. Eighty-six percent of those surveyed said they planned to buy fewer items, and in all they planned on spending 10 percent less than in 2001. He found more than a third of the respondents fearful for the economy and their jobs.

There's a whole lot more optimism now. In Beemer's latest survey of 413 people across the country, respondents said they plan to spend an average of $338.50 on back-to-school shopping this year, up almost 12 percent from $302.31 last year.

Beemer says that even while spending was falling, the number of units was holding its own or climbing. That means back-to-school budgets are being stretched through an increased emphasis on value shopping. "Where parents used to go to Burdine's to buy an outfit, now they're going to Wal-Mart," he says. "Discount stores like Target and Wal-Mart particularly are now perceived as having as good a quality as other stores. That's paramount for us to understand these days."

Another shift "is the number of consumers going to fewer and fewer stores. Today you can't afford to be someone's second choice, because being second could put you out of business," he says. America's Research's latest back-to-school survey indicated 30 percent of consumers plan to shop at three stores, but 51.9 percent plan to shop at either one or two stores.

"When you look at the growth opportunities today, it's not necessarily getting more shoppers in the front door, but more shoppers who know what they want to buy," says Beemer, adding that retailers need to get more focused in their advertising to better show young shoppers what they have to offer.

Beemer says this season probably will mark the continuation of another trend. "When teenagers go shopping by themselves for back to school, they go to the mall. But when parents are involved, the mall is becoming the second or third choice, in favor of freestanding stores like discount stores and power strip shopping," he says.

The NRF partially credits the anticipated boost in back-to-school spending to the $13 billion in tax credit checks being sent to more than 25 million families. "The refund checks could not have come at a better time," says Mullin.