People carry shopping bags in New York, New York, USA, 27 April 2018. The United States Commerce Department's Bureau of Economic Analysis reported today that the US economy grew at an annual rate of 2.3 percent in the first quarter, which is slightly above the average yearly growth rate.US Economic Growth, New York, USA - 27 Apr 2018

When Marc Schneider, chief executive officer of Kenneth Cole, checked the stock markets Thursday on the way back from a meeting with Dillard’s in Dallas, everything was humming along nicely. But that changed in a blink of the eye.

“The [stock] market was up and all of a sudden I looked and all the apparel stocks and footwear stocks were taking a beating,” he told WWD.

The reason for the sudden change was an unexpected series of lunchtime tweets from President Trump announcing that the U.S. government would introduce 10 percent levies on $300 billion worth of Chinese imports, including apparel and footwear, effective Sept. 1.

Schneider, like many other industry executives, had hoped the threat had passed since only a few weeks ago the administration indefinitely shelved its tariff plans after agreeing to resume trade negotiations with China.

He also thought that the industry had made a strong case against tariffs during summer hearings in Washington, D.C.

“I thought trade groups did a terrific job getting lots of people together with strong representation [at the tariff hearings] and I thought the two weeks were very beneficial. I was pleased with what we had heard right up until today,” he said.

But it turned out that pleas from fashion as well as other industries were not enough to dissuade the administration, which decided to pull the trigger as soon as U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin returned from a trip to Shanghai for the first formal resumption of talks since they broke down close to three months ago.

Trump explained in his tweets that while talks had been constructive, China had not followed through on its pledge to buy agricultural products from the U.S. in larger quantities, as well as failing to stop the sale of fentanyl.

The decision, although less than the previous threat of 25 percent tariffs, now puts a potential black cloud over the fashion and retail sector’s second-half earnings as companies are faced with either swallowing the tariffs and taking a hit or raising prices.

The sector is particularly reliant on China, with 42 percent of apparel and 69 percent of footwear sold in the U.S. last year being imported from China, according to the American Apparel & Footwear Association. It’s also an industry that is already grappling with high duties: 51 percent of those collected by the U.S. government came from the apparel, footwear, textiles and travel goods industry in 2017, despite accounting for only 6 percent of all imports.

“We do think it’s going to have a big impact on the retail sector,” Jay Sole, a retail analyst at UBS, said. “The market will likely interpret the tariffs as being something that will cause companies’ earnings to decline or at least decline relative to what the current expectation is, to be precise.”

Those expectations were already starting to set in Thursday as the Dow Jones Industrial Average, which had been trading in the green, sunk immediately, losing 1.1 percent, or 280.85 points, to close at 26,583.42 for the day.

The hardest hit apparel retail stock tracked by WWD was Ascena Retail Group Inc., which fell 17.9 percent to just 36 cents. That left the retailer, which recently shuttered its Dress Barn division, with a market capitalization of only $72 million — illustrating that investors are giving the company very little credit for its $6.6 billion in sales over the past year.

Also taking a beating in the market were Abercrombie & Fitch Co., down 11.2 percent to $16.81; Stein Mart Inc., 10.5 percent to 73 cents; J.C. Penney Co. Inc., 9.1 percent to 72 cents; G-III Apparel Group, 9 percent to $26.09; Kohl’s Corp., 8 percent to $49.65; Gap Inc., 7.8 percent to $17.96; PVH Corp., 7 percent to $82.80; Macy’s Inc., 6.6 percent to $21.21; Tapestry Inc., 5.4 percent to $29.27; Ralph Lauren Corp., 5.4 percent to $98.62; VF Corp., 4.6 percent to $83.37; Capri Holdings, 4.6 percent to $33.97; Target Corp., 4.5 percent to $82.62, and Walmart Inc., 0.9 percent to $109.38.

Kenneth Cole’s Schneider was particularly concerned about the crucial holiday season, which makes up the lion’s share of retailers’ profits.

“These tariffs absolutely affect the holiday season. It’s a crucial time for the industry and we receive a lot of goods over the next few months and sell a lot of goods over the next few months,” he said. “This is very disturbing news based on what we heard literally a month ago. “I believe in conclusion it will lead to higher retail prices, lower sales, lower quality and the loss of jobs and investments.”

Raising prices may not be easy, though, according to Jan Rogers Kniffen, a retail consultant at J Rogers Kniffen.

“We know you can’t pass anything onto the consumer; they’re just not taking any price increases….If the tariffs go through, we’re going to see a hit to second-half earnings and it’s not going to be an insignificant hit to apparel, accessories and shoe players,” he said.

As for the industry organizations, which have been warning for months that the duties are a tax on the American consumer as opposed to the Chinese, they were quick to express their anger at the administration’s decision.

Karen Giberson, Accessories Council president, said her heart breaks for everyone.

“An additional 10 percent means the margins for our wholesalers are certainly going to be eroded on holiday goods on their way. Perhaps some can be expedited to make that Sept. 1 deadline, but I’m guessing a lot of goods can’t be sped up to arrive here in time, so the biggest shipments of the year could be impacted by the 10 percent. Hopefully most people are prepared and were strategic about how they priced or negotiated with their factories so many people could have already planned for it. But not everybody did,” she said.

Rick Helfenbein, president and ceo of the AAFA, which represents more than 1,000 retailers and manufacturers, branded the Trump administration’s decision “truly shocking.”

“This decision will increase the tariff bill on all clothes, shoes and home textiles, like blankets and sheets — products that already account for the vast majority of the duties collected by the U.S. government,” he said, pointing to AAFA data laying bare the sector’s reliance on China.

David French, senior vice president for government relations at the National Retail Federation, added that there’s “no evidence another tax increase on American businesses and consumers will yield new results.”

Only the National Council of Textile Organizations welcomed the move, stating that it has long encouraged the administration to include finished products on the tariff list, “given China’s rampant intellectual property abuses and the significant impact it has had on our sector.”

The NCTO hopes that tariffs will lead to more re-shoring of production to the U.S. and the Western Hemisphere production platform.

However, Trump also in the past has threatened to impose tariffs on imports from two Western Hemisphere countries that are key suppliers to U.S.-based brands — Mexico and Guatemala — in his ongoing battle against illegal immigration. As for other potential suppliers, he also has removed special trade status from India.

All in all, the fashion and retail sectors face a complicated process of figuring out the administration’s trade policy — and where to shift production to next.

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