The apparel and footwear sector could see tariffs in 2019, predicted Cowen & Co. analyst John Kernan.
Kernan made that disclosure Thursday at a Retail Marketing Society panel discussion on “The Long and Short of Retailing Today: Wall Street’s Perspective” at Arno’s Restaurant in Manhattan. Earlier in the day, the analyst issued a report that said the “fourth tranche of tariffs on imported goods — the remaining $267 billion from China, which would include apparel and footwear — is likely to be levied by President Trump” following the mid-term elections, with implementation in early 2019. According to Kernan’s report, “This will spark higher costs for consumers within apparel and footwear, supply chain chaos and EPS reductions to our vendors [in the analysts’ coverage universe] by varying degrees.”
Kernan told attendees that at Sourcing Journal’s 2018 Summit in Manhattan last week — Sourcing Journal is a sister company to WWD and also owned by Penske Media Corp. — the “trade folks” he spoke with indicated that they are “nervous about the supply chain” issues that could be on the horizon. After the Retail Marketing presentation, Kernan told WWD that one big worry executives have is that they know they “just can’t move everything over” right away to a new manufacturing facility in a different country. Further, some of the Chinese factories used are considered “specialized” and can’t easily be duplicated elsewhere.
Kernan favors the off-price retailers, explaining that there are “350 C and D malls are going to get steamrolled because they are anchored by a Sears and a J.C. Penney.” Sears Holdings filed for bankruptcy court protection on Monday.
Kernan’s colleague Oliver Chen noted that the current retail and consumer backdrop is showing resilience. That’s because unemployment is at a low 3.7 percent, consumer confidence is at an 18-year high, and holiday sales are projected to grow between 3 and 4 percent.
Chen did note that J.C. Penney is one company to keep an eye on because of its issues during a period where it has been a “phenomenal consumer year.” He said one issue is that the retailer has “piles of stuff, way too much. The old ‘stack it high and watch it fly’ [theory] isn’t working and they know it.”
Chen also emphasized that while J.C. Penney has a sizeable amount of debt, it’s not due until 2023. Furthermore, the retailer just hired a new chief executive officer, Jill Soltau, earlier this month.
Telsey Advisory Group’s Joe Feldman said that while near-term fundamentals are good, “2019 could be choppy.” One concern raised by the analyst centers on what happens with consumer spending when tax cuts go away.
Feldman expects that at the “B and C malls, one will see The Gap move to shrink its store square footage.” He said the store footprint will likely be “around 8,500 square feet, down from 1,400 to 1,500 square feet.” That could mean more store closures and the company getting aggressive when reviewing store leases as they come due.