The $1.5 trillion overhaul of the U.S. tax system that President Trump signed into law just before Christmas has put retailers and fashion brands into an unfamiliar situation — with some extra cash coming and incentives to put it to work.
That’s a welcome change for retailers, after a difficult 2017, when the populist movement that swept Trump into office stoked uncertainty. And while that didn’t hurt the stock market, which roared repeatedly to new highs, it did seem to further distract shoppers, who were already seeming to lose interest in shopping and sinking further and further into their smartphones.
The mood was lifted some as the holiday rush picked up, but even so, companies of all sizes in the industry are working hard to reinvent for a more digital age and the new tax plan could help. The particulars of the bill and just how it will impact the average household were hotly debated last month, but experts agree that legislating a much-lower corporate tax rate, falling to 21 percent from about 35 percent, will give the corporate world of fashion a significant boost and might well help workers, too.
A full understanding of the sweeping legislation and how it will be implemented will only come as it is put into effect and companies find every loophole and maximize each new advantage. But the headline is good — very good — for retailers and the nitty-gritty details are not likely to overshadow the monetary benefits.
The question for companies now is just how to spend their savings — and stores, operations, employees, investors and shoppers could all get a chunk.
“You’re going to see savings applied in lots of different ways,” said Brian Dodge, senior executive vice president of public affairs at the Retail Industry Leaders Association. “You’re going to see retailers making investments in the business, you’re also going to see them use that savings to control prices where they can to increase their competitiveness. We’re at a time of particularly high competition for talent, so undoubtedly savings will find its way for competition for that talent.”
The sweeping legislation streamlines the tax code, which Dodge said had become overwrought as thousands of small changes built up over decades.
“If you can imagine not cleaning your basement for 31 years, the tax code needed some cleaning and that’s what they’ve undertaken here,” he said.
And that cleaning up will benefit companies that rely heavily on the U.S. market.
“The biggest beneficiaries will be U.S.-domiciled corporations that derive a majority of profits in the U.S.,” said Cowen analyst Oliver Chen.
Among the biggest gainers will be the department store operators such as Nordstrom Inc., Kohl’s Corp. and Macy’s Inc., which derive essentially all their profits from the U.S. Chen estimated that the tax overhaul would boost Nordstrom’s earnings per share 25.5 percent for 2018, while Kohl’s would gain 22 percent and Macy’s take would increase 21 percent.
In addition to a sharp cut to the corporate tax rate, the legislation could lead to a variety of other updates for retailers, influencing how they fund their orders, where they keep their intellectual property and what they do with money earned oversees, which can now be repatriated.
“The effort to understand what exactly is in the legislation is still continuing at a frantic pace,” said Stephen Lamar, executive vice president of the American Apparel & Footwear Association. “A lot of information is out on some of the top line changes, but how all those changes net out and effect your bottom line is still being modeled. This is a comprehensive, wide-ranging tax change. It will affect everybody.”
Getting the tax rewrite wrapped up also clears up what has been a major source of uncertainty for companies that already have enough question marks when it comes to planning their businesses for this year and beyond.
“People can now feel a little bit more comfortable with some of the investment plans they’re going to make,” Lamar said.
And the c-suite now has new things to consider when making those plans.
Lamar singled out one provision that allows companies to immediately expense investments in their business for five years, giving them an incentive to put some of their savings to work.
Retailers in general are pleased with the legislation, said Lisa Vines, global consumer product tax leader at EY. It could have gone the other way, especially given that early on in the process there was talk about a border adjustment tax, which would change the treatment for goods made oversees, as is common in fashion.
As it stands, Vines said the tax changes would “encourage spending on infrastructure. That’s spending in the store footprint and spending on other businesses around the actual store footprint.”
That money will likely come in handy as retailers double down on building in-store experiences to draw customers.
Vines said companies will also be digesting limitations on how they can deduct interest expenses, restrictions on how net operating losses are used to offset taxable income and other changes that could impact where they house their brand names.
“Retailers and apparel companies will have to look at where that [intellectual property] is generated and where it should be owned and the incentives are to keep that in the U.S.,” Vines said.
For public companies, though, as they tabulate their tax savings, many will find their investors are going to want a cut.
HSBC analyst Erwan Rambourg noted that Tiffany & Co.’s corporate tax rate is likely to fall to 27 percent from 33 percent, lifting earnings by about 8 percent.
“We believe Tiffany is unlikely to make any acquisition or any big investments in stores or [information technology capital expenditures] in the near future, meaning a dividend distribution hike is a higher probability,” he said.