It was reported this week that another round of tariffs could be unveiled as early as December if tensions between the U.S. and China are not eased at the upcoming G20 summit.
If this materializes, it will mean that the administration imposes levies on every single Chinese import entering the U.S., finally impacting apparel and footwear, which unlike handbags largely escaped the previous round of levies.
In preparation for more potential tariffs, Ike Boruchow, a senior analyst at Wells Fargo, looked at some of the retailers that could be hit hard by another round of tariffs and at those that should be relatively low-risk.
“While we believe that many of our names would be able to offset the bulk of this impact between a combination of internal cost saves and higher pricing (essentially, passing the cost off to the consumer), we feel that it is important to understand who will be under the most pressure to do so,” he said in a note to clients.
Steve Madden, Ltd.
The New York-based footwear and accessories company is currently facing an EPS headwind of roughly 15 percent from the already announced handbag tariffs, but new levies will mean more pain. Boruchow estimates that if footwear is targeted, this will rise to an eye-watering 70 to 80 percent for 2019.
Skechers USA Inc.
Though not quite as exposed as Steve Madden, Skechers still sources over 60 percent of its merchandise from China. When coupled with its relatively lower margins of 8 to 9 percent, this adds up to a potential EPS hit of 40 to 45 percent.
Gap Inc., Urbans Outfitters, Inc. and J. Jill Inc.
All three retailers could face 25 to 40 percent EPS headwinds despite only sourcing 15 to 30 percent of their stock from China. This is because they generate most of their sales in the U.S. and they all have single-digit operating margins, so additional costs from tariffs would have a meaningful effect on profits.
Stitch Fix Inc.
Wells Fargo estimates that only 10 percent of online styling service Stitch Fix’s goods are exposed to tariffs. However, given that their EBIT margin is less than 2 percent, the tariffs on those 10 percent of products would eliminate 30 to 35 percent of the Silicon Valley-based company’s earnings.
Under Armour Inc.
Although athletic brands are broadly well-insulated from tariffs, Under Armour is a unique situation within the athletic space, because it has depressed margins. This means that a little bit of tariff headwind would eliminate a large chunk of the earnings base, which Wells Fargo believes presents a 35 to 40 percent hit. It noted, however, that since less than 15 percent of goods are sourced in China today, it probably wouldn’t be that difficult for Under Armour to pivot away from this market.
Lululemon Athletica Inc., Adidas AG and Nike Inc.
The most insulated group appears to be the athletic space, which is due to the fact that these companies have generally moved their sourcing bases out of China, with only 10 to 25 percent of product sourced from China.
They also generate a large amount of international sales and they’re high-margin businesses that can more easily absorb additional costs. That’s why Wells Fargo is forecasting only a 5 percent EPS headwind for all three.
“For Nike, we’d note that the company-wide China sourcing penetration is relatively high at 26 percent, but we believe that most of this is product made to be sold in China, and we estimate that only 10 to 12 percent of their U.S. products come from China,” said Boruchow.
PVH Corp., VF Corp. and Ralph Lauren Corp.
Calvin Klein and Tommy Hilfiger owner PVH and VF Corp., whose brands include Vans and The North Face, are set to emerge relatively unscathed with EPS headwinds of 5 percent or less. That’s due to their international footprints and fairly low China sourcing exposure (Wells Fargo estimates 10 percent for PVH and 12 percent for VFC). Ralph Lauren is not far off at a 6 percent headwind. It’s slightly higher because it has larger China sourcing exposure.
The TJX Cos. Inc., Ross Stores, Inc. and Burlington Stores Inc.
According to the report, the off-price channel is also well positioned as these companies directly import a very small percentage of product that they sell. “We believe that they are in the proverbial “driver’s seat” when it comes to negotiations with their suppliers. All in, we estimate around 6 percent average headwind to the off-pricers,” added Boruchow.
The latest trade war developments:
After already imposing tariffs on $50 billion of goods, President Trump unleashed another round of 10 percent tariffs on $200 billion worth of Chinese imports, many of them consumer facing, in September. That rate will more than double to 25 percent at the year end. China hit back straight away with tariffs on $60 billion of U.S. imports.
At the same time, President Trump renewed his threat to target another $267 billion worth of Chinese imports that he can hit with levies on short notice, if further provoked by China. If he plays this hand, it will push the total amount of tariffs up to $517 billion, meaning every single Chinese product coming into the U.S. will be subject to levies, hurting the fashion sector, which is heavily reliant on China.
While the administration has remained relatively quiet on this front ever since, Bloomberg News reported earlier this week that it is tentatively preparing the next round of tariffs to be unveiled in December and implemented as early as February if talks at the G20 summit next month between the heads of the two superpowers fail to ease tensions.