The year for retail is setting up to be a "tale of two halves," with the outlook improving for the sector thanks to wage inflation, analyst Liz Dunn said Thursday.
"The first half was weather wasn't cooperating, we had the port situation on the West Coast that made inventory difficult to get," the founder and CEO of Talmage Advisors said in an interview with CNBC's "Power Lunch."
However, there are some good economic signs for the back half as it relates to the consumer. And that's good news for retailers as the all-important holiday shopping season looms ahead.
"The last couple months have looked really good in terms of wage inflation, and we're hearing these big companies out there raising wages and I think all of that plays very well for the consumer," noted Dunn, who has been analyzing brands and retailers for 20 years.
While the SPDR S&P Retail ETF, a basket of retail stocks, is outperforming the , it has been a very uneven year for the sector—with many department stores and apparel stores in the red.
When it comes to picking stocks, Dunn would stick with the winners.
"I think those that won in the first half are probably going to continue to do so in the back half," she said. "It's really about share gains."
She also likes Lululemon, despite reports that founder in the yoga apparel maker. Wilson left the company's board earlier this year after disagreements with other board members.
"This has been something that's been in the works for some time and I think Chip has been a little bit of a distraction here in the last year and a half or so," said Dunn. "I think it's good to sort of cut the cord and move on."
Meanwhile, she'd stay away from teen retailers, with perhaps the exception of American Eagle, because she thinks they'll continue to lose share.
Another name that's been hit is Fossil, down more than 35 percent year to date. Dunn attributed that performance to disappointing earnings results and fear surrounding the impact of the Apple Watch, said Dunn.
"Going forward I think there's going to be more focus on the Apple Watch and I think a move away from traditional watches."
—CNBC's Bob Pisani and Reuters contributed to this report.
Disclosures: Liz Dunn's possible positions on L Brands, Target, Lululemon, American Eagle and Fossil were unavailable.