Retailers in spotlight as tariffs on consumer products kick in
Aug 30, 2019
U.S. retailers will be front and centre on Wall Street next week as the United States imposes new tariffs on $300 billion worth of Chinese imports, including clothing, footwear and jewelry.
The upcoming tariffs on Chinese goods will hit consumers more directly than duties already levied against $250 billion worth of imports. Retailers are scrambling to cut costs and find ways to minimize the damage to their bottom lines, while Wall Street analysts try to identify those best positioned to weather the taxes.
The U.S. government is set impose tariffs on the newest list of products starting Sept. 1, with tariffs on about half of those goods delayed until Dec. 15 in a bid to soften their impact on holiday shoppers. President Donald Trump last week upped the tariffs to 15% from an originally planned 10%.
Trump's aggressive stance and often mixed signals in his trade war with China have taken a toll across Wall Street in recent weeks, especially on the shares of companies that rely heavily on the world's second-largest economy.
Tariffs starting on Sept. 1 will affect $39 billion worth of footwear and clothing, with the December tariffs affecting another $12 billion worth of such products, according to the American Apparel & Footwear Association.
Investors are looking for retailers most able to hold prices steady without hurting their margins, or increase prices without hurting demand for their products. They are also looking for companies that rely less on China for their wares.
"We're leaning in on quality across our Hardline Retail universe, favouring retailers with scale, pricing power in respective categories, less elastic products, and a greater focus on (professional) influenced sales and initiatives," Wells Fargo Securities analyst Zachary Fadem wrote in a report this week.
A basket of companies impacted by the trade war, created by Barclays, has fallen around 8% this month, underperforming the S&P 500. Barclays’ basket includes consumer-facing companies that it estimates receive over 40% of their sales from products imported from China, including Nike Inc. .
Heavyweight retailers, including Walmart Inc, Costco Wholesale Corp and Target Corp, can adjust their global supply chains and use their clout to force suppliers to accept smaller margins to offset the tariffs, giving them an advantage over smaller competitors.
Showing that investors are willing to buy retailers positioned to weather the trade war, Walmart has gained 7% since its quarterly report on Aug. 15, when it said it had raised the prices of some of its items due to tariffs but was not passing all the cost pressure it faces on to consumers.
Target has surged 26% since its Aug. 21 quarterly report, when it boosted its full-year profit outlook, even after accounting for potential additional tariffs.
A letter this week to Trump from over 200 U.S. footwear companies, including Adidas and Foot Locker Inc, warned that the upcoming tariffs would exacerbate economic uncertainty and could drive up prices in other countries that produce footwear, given limited production capacities.
"Tariffs taking effect September 1 will result in higher costs for American families and slow the U.S. economy," commented the National Retail Federation earlier this month. "We urge the administration to develop an effective strategy to address China’s unfair trade practices by working with our allies instead of using unilateral tariffs that cost American jobs and hurt consumers.”
Abercrombie & Fitch Co slumped 15% on Thursday after the apparel retailer cut its full-year sales forecast in anticipation of the new tariffs.
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