Investors dove into fashion stocks Thursday, shrugging off new warnings that the U.S.-China trade war is exacting a financial toll and betting that Beijing and Washington are finally ready to work things out with a new round of trade talks next month.
G-III Apparel, which owns DKNY and has the license for several Calvin Klein products, was one of the day’s biggest winners, with its stock jumping 27 percent to close at $23.84 despite revealing earlier in the day that new tariffs would cost it $12 million.
Also clocking in hefty gains were American Eagle Outfitters Inc., up 13 percent to $16.28; Signet Jewelers, 27 percent to $13.97; Gap Inc., 5 percent to $16.99; Abercrombie & Fitch Co., 6 percent to $15.42, and Nordstrom Inc., 5 percent to $31.07. The Dow Jones Industrial Average closed up 371 points to 26,728.15.
Investors came into the day feeling bullish after word came that the U.S. and China were ready to sit down again next month for high-level negotiations, although the back and forth has been strained at times with previous rounds of talks scuttled at the last minute.
Retail consultant Jan Rogers Kniffen said most investors are already planning for the worst-case scenario so any reason for optimism, however fragile, will result in a stock market boost.
“We all believe that [retailers and manufacturers] are not going to be able to pass [the cost of tariffs] onto the consumer,” he said. “So if they can’t, it comes right out of their earnings or out of the factory. But someone has to pay, so every time you get something like this when they say, ‘Gee, maybe we’re going to talk’, we all get optimistic and say, ‘Oh my god, maybe these tariffs aren’t going to happen after all.'”
That sentiment was shared by Alec Young, managing director of global markets research at FTSE Russell, who told clients that even though expectations for a robust trade deal are low, “with global growth continuing to deteriorate as trade tensions mount, investors are relieved just to see talks are back on.”
The strong market performance came despite a shaky start to the day, which began with G-III downgrading its net income outlook for the full year to between $154 million and $159 million, or between $3.10 and $3.20 a diluted share. This compares to its previous expectation of between $163 million and $168 million, or between $3.19 and $3.29 a diluted share.
While the company had managed to mitigate some of the previous tariff headwinds, the 15 percent hike to levies that was imposed on Sunday, and the threat of more increases, left it with little choice but to cut expectations.
“Based on the additional tariffs that were just implemented, we feel it is prudent to revise our guidance to a more conservative posture for the remainder of this fiscal year,” Morris Goldfarb, G-III’s chairman and chief executive officer, told analysts following the release of its second-quarter earnings.
Jeff Gennette, Macy’s ceo and chairman, issued a similar warning Thursday, telling the audience at the Goldman Sachs Annual Global Retailing Conference in New York that the new tariffs could wipe as much as 7 cents off the department store chain’s earnings per share guidance for the year.
These warnings follow last week’s statements by Emanuel Chirico, chairman and ceo of PVH Corp., the owner of Calvin Klein and Tommy Hilfiger, who cut the group’s growth forecast because of the tariffs.
For now, as companies watch trade talk developments closely and hope that more levies scheduled for mid-December can be staved off, they are all scrambling to navigate the current tariff environment.
In the case of G-III, that has meant diversifying some of its supply chain away from China, although Goldfarb stressed that he is only willing to go so far until the trade outlook becomes less uncertain.
“Once you get your production out of China you’re terminal, you can’t bring it back,” he said.
The company has already reduced its sourcing reliance on China from 80 percent four years ago to around 50 percent and the industry veteran was adamant that it is not the right business decision to push this number down to zero.
“Those factories will go out of business, the G-III factories will go out of business, because they’re highly dependent on G-III. You can’t make a U-turn if all the trade issues are solved and say I made a mistake. I’m going back to where it’s best for me,” he said.
“You still need to keep a foothold until we fully recognize the depth of the problem, and the term of the problem so we are exactly where we want to be.”
Macy’s has also been “working very hard” to mitigate costs, according to Gennette. To date, this has involved trying to switch up its supply chain for its private brands, as well as working with its current manufacturing partners in a bid to mitigate many of these costs.
Bruce Besanko, chief financial officer at Kohl’s Corp., was also at the Goldman conference and stressed that the retailer’s top priority is to maintain its value proposition for customers.
“We’re certainly partnering with our vendors and suppliers to be sure that we try to avoid having an impact to our customers. Second, we have been undergoing a diversification strategy with respect to our China products over time,” he said.
He warned, however, that this was becoming more difficult to navigate as tariffs increase.
But signs of strain are starting to show and some retailers are pushing back on suppliers.
Last month, Target Corp. wrote a letter to vendors stating that it would “not accept any new cost increases related to tariffs on goods imported from China.”
If U.S. and Chinese negotiators can’t reach some agreement when they sit down next month, the pressure on the fashion world is only going to keep growing as brands and retailers scramble to pass off higher costs, further contributing to worries over a global recession.