7 Retailers To Play Favorable Q3 Weather

Based on its meeting with Weather Trends International CEO Bill Kirk, Cowen said in a note Tuesday that the second-half could turn out great for retailers. The key takeaways from the meeting include August being the coolest in 13 years and a potential positive metric for back-to-school apparel sales.

"WTI's 3Q weather outlook seems very favorable, with the U.S. expected to be the coolest and wettest in 8 years," the firm added.

The firm's top retail weather picks include:

• adidas AG (ADR) ADDYY.
• Burlington Stores Inc BURL.
• Lululemon Athletica inc. LULU.
• PVH Corp PVH.
• TJX Companies Inc TJX.
• Ross Stores, Inc. ROST.
• Wal-Mart Stores Inc WMT.

A Well Begun Second-Half

Analyst Oliver Chen referred to WTI's commentary that the second-half weather is off to a strong start, with the August temperature favorable for the beginning of back-to-school season. The analyst thinks the rest of the fall and winter are also set up well.

From the weather perspective, citing WTI's view, Chen said the fourth quarter will be the most favorable, followed by the third quarter.

Commenting on the back-to-school season, WTI said apparel sales increased in double-digit percentage, with the strongest performance in the Northeast, while the Northwest was the weakest.

Cooler Weather To Aid Full-Margin Seasonal Sales

WTI expects October to be mostly cooler and wetter than last year. The firm also expects a strong start to the fourth quarter, encompassing the months of November, December and January, with cold and wet temperatures in November leading to full margin seasonal sales. Additionally, WTI expects a strong holiday season, with relatively cold and dry weather in December.

Cowen thinks favorable weather trends could be a positive catalyst for a number of apparel-related companies in the second-half, especially the ones with strong e-commerce platforms. The expectation is based on the view that the weather is likely to be wet and cold.

See also: Retail To Finish Q2 Earnings Season As Challenges Continue

Department Stores: Relative Winners

The firm sees department stores such as Nordstrom, Inc. JWN, Kohl's Corporation KSS, Macy's Inc M and J C Penney Company Inc JCP as relative winners, as positive weather compares with last year drive traffic to malls and alleviate some comp pressure.

Further, the firm noted that department stores exited the second quarter with cleaner inventory positions. This, according to the firm, could help with promotions and maintain merchandise margins, even if the weather is less favorable than expected.

Meanwhile, the firm said it likes American Eagle Outfitters AEO's ability to capitalize on seasonal weather, given their strong execution in denim.

The firm expects the cold winter to benefit broadline retailers such as Wal-Mart, given the broad sales mix, ranging from grocery, apparel, home etc. Even among these names, the firm said it is more bullish on Walmart, given the 60+ percent online sales growth and the curbside pick-up rolling out to over 1,100 doors.

The firm believes this will perform well, as people are increasingly averse to moving out of their cars.

Volatility In Weather Could Shift The Scales In Favor Of Off-Price Retailers

"Meanwhile, if volatility in weather trends is greater than anticipated, we think off-price retailers such as TJX and ROST could be better positioned to shift sales mix accordingly based on abilities to quickly adjust to changing conditions on higher inventory turns and larger open to buys," the firm said.