The latest tariffs imposed by U.S. President Donald J. Trump will have fewer impacts on many apparel brands and present greater issues for retailers.
Compared with tariffs he imposed during his first term, the new duties are bigger as Trump seeks to exert pressure on Mexico, Canada, and China to stop illegal migration and the flow of fentanyl into the U.S. The 25 percent tariff on Mexican and Canadian imports are sweeping, with few exceptions.
Currently, the tariff on Mexican imports are delayed by 30 days after Mexican President Claudia Sheinbaum agreed on Monday to send 10,000 troops to her border to prevent drug trafficking. Tariffs on most Canadian imports were set to start on Tuesday, with energy resources having a lower tariff of 10 percent. Late Monday, Trump agreed to pause implementation of the Canadian tariffs, also for a period of 30 days. The delay was due to Canada’s agreement to take measures to curtail the border flow of fentanyl into the U.S. And while Canadian Prime Minister Justin Trudeau had slapped a 25 percent retaliatory duty on American-made goods ranging from apparel to footwear, home and furniture, it is presumed that those duties are on hold as well. The 10 percent tariffs on all Chinese imports—on top of existing tariffs—are also slated to begin on Tuesday.
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For fashion brands, Jefferies equity analyst Ashley Helgans said firms under her coverage range have “limited sourcing exposure to China” at 10 percent or less. The analyst said Tapestry Inc. and Ralph Lauren Corp. have the ability to continue to raise prices to mitigate any cost impacts.
“Companies also have become increasingly agile since the pandemic in diversifying sourcing,” Helgans said.
She concluded that department stores such as Kohl’s Corp. and Macy’s Inc. will see more risk to their top-and-bottom lines. That’s because they are value-focused and have consumers who are more susceptible to inflationary pressures from increased tariffs on imports. Helgan noted that Kohl’s in 2019 said it had “slightly more than 20 percent China sourcing exposure.”
For other fashion brands, the analyst said Capri Holdings Ltd. has less than 5 percent China exposure, while PVH Corp. noted in 2019 its exposure back was between 10 percent to 12 percent. For footwear, VF Corp. said recently its China exposure was minimal, with the analyst noting that in 2019 the company has predicted U.S. imports from China would be 4 percent in 2020.
TD Cowan analyst John Kernan also said that the headline 10 percent tariff increase on Chinese imports of apparel and footwear, from a sales exposure point of view, “represents little [earnings per share] risk in our coverage, though China retaliation is a rising risk.” Brands that he says have “significant” China sourcing exposure include Skechers at 45 percent, Amer Sports at 33 percent, Puma at 32 percent (which includes good made for sale in China), and Nike at 18 percent.
Footwear firms in particular are expected to be hard hit because China is one of the top three suppliers to the U.S. The Footwear Distributors and Retailers of America CEO Matt Priest has said that the tariffs are inflationary for consumers because the majority of the pairs of footwear imported from China are tagged as “value product” sold at mass retailers that include Target and Walmart. The mass discounters are where many working families shop.
The order Trump signed on Saturday also contains language specifying that the de minimis trade exemption—which allows for shipments worth less than $800 to enter the U.S. duty-free—is now closed for products subject to the tariffs. Kernan said the revocation of duty-free de minimis treatment will hurt Chinese firms Temu and Shein, but that “could help the off-price retailers in the long run given the heavy cross shopping.”
How retailers will react to the increased costs and what proportion will be allocated as a pass-along to consumers remains to be seen. The tariffs may not be long-lived if Trump gets the concessions that he wants. For example, the one-month delay on when tariffs begin on Mexican and Canadian imports could be rescinded as government officials negotiate a resolution. Meanwhile, Tractor Supply CEO Hal Lawton said he has a playbook for tariffs from 2018. That playbook called for a one third share contribution each among manufacturers, customers and Tractor Supply.
A report from Coresight Research indicated that retailers such as Lowe’s, TJX Cos., Walmart, and Wayfair have said that they anticipate price increases should the tariffs be implemented. In addition, retailers or brands that rely less on imports, such as Williams-Sonoma, could gain an advantage if tariffs are imposed as their products “would be competitively priced within the U.S. market.” In contrast, retailers in the electronics and toy categories are expected to lose market share to other competitive retailers since those sectors rely heavily on imports.
Separate from the impacts on apparel and footwear, tariffs are expected to increase costs in other sectors as well. Logistics is one area, and so are paper products and packaging, which are in high demand in the e-commerce sector. While that could force companies to look at options for alternate sourcing, the ability of some firms to absorb new demand could be an issue.
