Colder weather could spell hotter holiday sales for retailers - Wells Fargo

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A cold-snap across the nation into the peak holiday shopping period could portend rising sales at softlines retailers, according to Wells Fargo.

A team of analysts led by Ike Boruchow noted that temperatures across the nation are expected to be about 4 to 5 degrees colder than the prior year. After speaking to experts, his team reported that each one degree drop in temperature “typically yields a 5% increase in women’s outerwear, a 3% increase in boots and men’s outerwear, and a 2% increase in jeans” sales from the prior year. With temperatures forecast to be the coldest in nearly a decade over the next 1.5 months, the team sees bullish holiday sales ahead for outerwear retailers. Specifically, Canada Goose (NYSE:GOOS), Burlington Stores (NYSE:BURL), and G-III Apparel (NASDAQ:GIII) are expected to benefit as the bank’s “top names to play.”

Boruchow added that the fact that Christmas falls on a Sunday extends the holiday shopping season from Black Friday to Christmas. The higher extra few days and higher traffic shopping days near the weekend are also expected to spur on sales.

Adding to bullishness on holiday sales, Mastercard’s (MA) SpendingPulse data projects a 15% jump in sales on the day after Thanksgiving in 2022 as compared to 2021. In particular, in-store retail sales anticipated to be up 18% year over year as shoppers once again flow into brick and mortar locations after a pandemic pause. Department stores like Macy's (M), Dillard's (DDS), Nordstrom (JWN), and Kohl's (KSS) are expected to drive sales, with Mastercard projecting a 25% or greater leap in sales from 2021.

Significant discounts at department stores bloated with inventory is also expected to entice shoppers into the year-end.

“While retailers have already been heavily discounting this season, consumers and retailers are likely holding out for some special offers to land on the biggest promotional day of the year,” Steve Sadove, senior advisor for Mastercard (MA), commented.

To be sure, Boruchow was less optimistic on this point. He and his team called the inventory-to-sales spreads for the softlines retailers “the worst we have ever seen” and forecast significant margin compression. Overall retail inventory is about 39% higher year over year, according to Wells Fargo estimates.

“Some of the experts we spoke to believe this holiday period could be one of the most promotional selling periods in the last decade,” Boruchow warned. “Industry participants also believe that although some retailers may be light on inventory themselves, the expected level of promotion across the space throughout the holiday period could drive consumers to opt for deals and value, and thus drag those who are inventory-light into promoting alongside inventory-heavy participants in order to drive traffic and compete for gift sales.”

Specific categories expected to see the greatest impact include active-wear and women's casual.

Read more on the rally among retail names sparked by Walmart’s results on Tuesday.