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Cowen: “Bloated” Inventory to Pressure Retail Through Spring

Weird weather and the like has many retailers stuck with winter stock, and the surplus will likely plague them through the spring.

In its latest Retail Outlook, financial services firm Cowen and Company said the inventory oversupply will weigh on margins and slow flow of product for spring/summer 2016, and downward earnings revisions from retailers won’t be far behind.

Despite cooler temps setting in, the untypical weather seen in the last few months has already done its damage.

In a separate weather-specific report that Cowen released last month, Weather Trends International CEO Bill Kirk spelled out a weather forecast that’s simply bad for apparel.

Kirk’s forecast, Cowen said, “left us incrementally negative on apparel as forecasts for a warmer winter should subdue outerwear sales and a colder spring should hinder full-price spring biz.”

Retailers have marked down winter gear in desperate efforts to be rid of it before spring, but even the highly promotional prices aren’t pulling consumers in at rates worth writing home about.

“The lack of sustainable cold weather inhibits need-based purchases by consumers,” Cowen said.

And according to Weather Trends, the La Niña weather pattern that brings below-average temperatures will set in after El Niño’s warmer than average weather.

“La Niña is expected to follow El Niño, bringing cool, wet temperatures through spring, followed by excessive heat in summer and extreme cold in winter,” Cowen’s report noted. “Brands exposed to seasonal offerings may be further pressured near-term following additional forecast resets post Q4 earnings results reporting in Jan-Feb.”

Sporting goods retailers, department stores and footwear purveyors are holding the highest levels of inventory, while stock conditions at off-price and broadlines are a bit better.

Weather aside, there are six themes building momentum in retail right now, according to Cowen: 1) Sourcing costs continue to rise as labor costs compound, rendering supply chain efficient franchises more valuable; 2) Amazon’s position in apparel will continue to improve; 3) Mobile visitation will continue to ramp up from holiday highs; 4) Convergence of consumers and technology will have significant implications for brands that can capitalize on it, and Under Armour, Nike and Fitbit are well positioned; 5) Low-income consumers are seeing significant growth in wages; 6) and there are prospects for a credit event in the sector as several retailers have bonds trading at distressed levels.

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“Our top picks for 2016 as it relates to prevalent themes along with our above consensus EPS [earnings per share] expectations and attractive valuations are Hanesbrands ($38 price target), Nike ($150 price target) and Burlington ($65 price target),” Cowen said.