The bloodbath at malls is about to get worse — unless the U.S. and China can resolve their differences fast.
Analysts at investment bank UBS cautioned that President Trump’s proposed new 25 percent tariffs on all Chinese imports that have not yet been targeted, including apparel and footwear, could result in the closure of 12,000 stores and the loss of $40 billion worth of sales.
“Our view is the market is not realizing how much brick-and-mortar retail is incrementally struggling and how new 25 percent tariffs could force widespread store closures,” UBS retail analyst Jay Sole wrote in a note to clients Monday.
What’s more, the number could be even higher as the research is just based on the 73 companies that Sole covers and does not include the potential impact on privately held retailers’ profit margins.
The tariffs, of which the paperwork has already started and are expected to go into action at the end of the summer unless the two sides can reach an agreement, come at a trying time for the retail sector.
The industry has already seen more store closure announcements this year than in the whole of 2018, driven by a combination of disappointing holiday results and many brands rethinking their physical footprint as they beef up their digital businesses in the Amazon era.
If even another 6,000 stores close over the next year, it would likely be highly disruptive, according to Sole. He believes that while store closures can sometimes be a good thing, that wouldn’t be the case in this instance as it would cause “intense inventory dislocations and discounting.”
It could also make some smaller malls unviable, which would have a knock-on effect on healthy retailers, not to mention an impact on jobs and the larger economy.
This came as analysts at Cowen waded through filings made by companies in their coverage to the Securities and Exchange commission to calculate which ones were most vulnerable from higher levies.
They singled out Skechers USA Inc., G-III Apparel Group, Carter’s Inc., PVH Corp. and Ralph Lauren Corp. as having “outsized” earnings per share risks. The first two source the majority of their goods from China, while PVH brings in around $400 million worth of Chinese imports into the U.S.
“In a time of accelerating disruption from technology and Amazon, 25 percent tariffs on apparel and footwear will create major disruption,” said John Kernan, a retail analyst at Cowen. “There is little capacity in other regions for a mass migration out of China sourcing, and supply chain costs will continue to rise globally.”
His comments contrasted with a tweet Tuesday morning from Trump, which stated: “Make your product at home in the USA and there is no tariff. You can also buy from a non-tariffed country instead of China. Many companies are leaving China.”
While some companies, including G-III, have made efforts to start to try to de-risk from China, for many, moving a large portion of their operations out of China will be a lengthy process that could take several years, not something that can realistically be done in the space of a few weeks.
Instead, Cowen believes that many retailers will be left with little choice but to raise prices by as much as 10 percent, which would yield up to $100 billion or more of incremental cost to consumers, depending on the breadth and depth of goods impacted.
Its research was backed up by the U.S. Fashion Industry Association, which warned Tuesday that tariffs are a tax that will be paid by American companies and ultimately by American consumers.
“These tariffs on imports of clothing, home textiles and footwear will do little to punish China for its intellectual property and technology transfer practices but do a lot to harm American fashion brands and retailers as well as consumers of their products,” said its president Julia Hughes.
As for the retail stocks singled out by Cowen, they ended Tuesday with mixed fortunes. Skechers was up 1.4 percent to $27.97, but Ralph Lauren was down 3.7 percent to 113.95; PVH 0.1 percent to $112.37, and G-III, 4.2 percent to $32.59.
The Dow Jones Industrial Average managed to close up 207 points, or 0.82 percent, to 25,532.05, making up for some of Monday’s losses when it ended the day down 2.4 percent.
Monday’s nosedive was on the back of China announcing it would add 25 percent duties to $60 billion in U.S. imports, starting in June. Last week, Trump boosted tariffs on $200 billion in Chinese-made goods, including handbags, to 25 percent from 10 percent, effective immediately.
Investors were said to be boosted by another of Trump’s tweets Tuesday morning, which stated that the U.S. could make a deal with China tomorrow if it wanted, although he later added that the timing needed to be right.