Paul Ryan

From tax reform to a buoyant stock market, 2017 will see lots of changes — both good and bad — that will impact retailers and fashion brands, according to two analysts’ reports.

In its annual outlook report, analysts at Telsey Advisory Group sees sweeping changes, “which is exciting and creating cause for optimism as expressed by the recent performance in the U.S. stock markets,” they noted. But the analysts quickly added that there is concern because a lot of the change on the horizon “is unknown.”

From oil prices and proposed tax reform to tourism and the fate of the U.S. health care system, the Telsey analysts said the impact on consumer spending could be significant.

Meanwhile, in a separate outlook report from Wells Fargo Securities, analysts at the firm focused on the implications of potential tax reform in the U.S. — and found that retailers and apparel firms will see their bottom lines impacted.

Ike Boruchow, senior analyst at Wells Fargo Securities, said in his report that the most relevant portions of House Speaker Paul Ryan’s proposed Republican Tax Reform Plan are the proposals to eliminate the tax deduction on imported goods. Boruchow said it “would be a material negative across our coverage universe,” but that reducing the corporate income tax rate from 35 percent to 20 percent would clearly benefit retailers. Digging deeper, Boruchow said to fully assess the impact it was important to determine the percentage of cost of goods sold that are imported as well as the “margins structure” of the business. Also knowing the domestic sales as a percent of total business would clarify the impact of the tax reform plan.

“While companies that generate most of their sales and profits within the U.S. may benefit from a lower tax rate, they may also experience an increase in their taxable income,” Boruchow said. “Geographic mix can have both a positive and a negative impact. Thus, given the various differences in business models across our group (wholesale versus retail, global versus domestic, multibrand versus monobrand, etc.), the range of possible outcomes is quite wide.”

The Wells Fargo analysts acknowledged that there are many variables to consider but looking at margin structure, domestic sales and COGS, “we find that off-price, jewelry retailers and essentially domestic retailers of third party brands (that have pricing power) are best positioned to deal with any fallout from these political changes.”

“This is primarily due to the high proportion of domestic sales, combined with their low level of imports and top-line/category momentum,” Boruchow said adding that as a result retailers in his coverage universe that would be best positioned and even benefit from these changes would be Burlington Coat Factory; TJX Cos.; Ross Stores; Tiffany & Co.; Finish Line; Signet Jewelers, and Ulta Beauty.

“On the flip side, given the high degree of imports and low gross margins, apparel retailers and footwear manufacturers (as well as watch manufacturers) appear to be the most at risk subcategories — and we’d be incrementally more cautious on Carter’s Inc., Urban Outfitters Inc., Under Armour, Fossil Group and Gap Inc.,” he said.

In the Telsey Advisory Report, the analysts said with the change of administrations to President Trump from President Obama “there are expectations for many pro-growth policies under Trump, including tax reform and infrastructure investment, but there may well be offsetting impacts caused by possible tariffs, an overhaul to the Affordable Care Act, a hold on minimum wages and higher interest rates.”

“In our view, consumer (and other) companies should benefit from a profit standpoint,” said Dana Telsey, chief research officer of the firm. “But consumers may not share in the upside to the same extent, which could pressure spending. While we foresee a scenario in which more affluent consumers benefit from the Trump administration’s policies, lower- to middle-income consumers may remain under pressure or even come under more pressure given Trump’s views on many issues important to them, especially wages and health care.”