MW Trump's new tariffs might not hit clothing retailers much now, but analysts warn price increases could backfire
By Bill Peters
'The consumer is not positioned to pay more for discretionary goods given pressures elsewhere in their budgets,' BofA analysts say
Lots of clothes on store shelves could get a bit more expensive as a new round of tariffs from President Donald Trump takes hold on Tuesday. But after three years of price increases and higher costs of living, some Wall Street analysts say shoppers might be too worn out to buy any of it.
"We don't expect apparel retailers to be successful in passing through costs to consumers; the consumer is not positioned to pay more for discretionary goods given pressures elsewhere in their budgets," BofA analysts said in a research note on Monday.
Still, the BofA analysts said, the new tariffs' impact on specialty retailers and department stores would pressure profit margins "only modestly as imports from those countries are limited."
Trump over the weekend said the U.S. would impose a 25% additional tariff on imports from Mexico and Canada - although energy from Canada will be taxed at 10% - with a 10% additional tariff on imports from China. Canada said it planned to respond with its own tariffs on products from the U.S., while Trump on Monday said he would hold off on the tariffs against Mexico for a month.
Economists have said any new tariffs risked pushing prices higher, as the businesses importing products pass the extra costs of those duties onto shoppers. How much prices might rise while the tariffs are in place isn't exactly clear. Different companies might absorb those extra costs more than others. But some analysts have said retailers, which often run on narrow margins, have little choice but to pass the costs onto shoppers via price increases.
Teen-centric discount retailer Five Below $(FIVE.UK)$, the analysts at BofA said, was among the chains that imported a lot of things from China. Footwear maker Skechers USA $(SKX)$, they said, was another. Western-wear chain Boot Barn $(BOOT)$, the analysts said, got 30% of its items from China and 25% from Mexico. Most of the goods sourced by department-store chain Kohl's Corp. $(KSS)$, were made outside the U.S., and largely in Asia.
Elsewhere, analysts at UBS on Monday noted that shoe maker Steve Madden $(SHOO)$ relied heavily on China for products, even as the company tries to shift production elsewhere. Winter-jacket maker Canada Goose $(GOOS)$, they said, relied solely on Canada.
The UBS analysts also said that the cost of goods sold - or the cost to make and sell things - could rise 9% for Boot Barn and 25% for Canada Goose due to the tariffs. However, they said that the average "softline" company they followed - those being businesses that make and sell things like clothing and linens - would only see a 1.6% increase in cost of goods sold because of the new tariffs.
The BofA analysts on Monday said that the full impact from the new tariffs might not emerge until several months from now, but that the pressure could start building in the second quarter of this year. The topic is likely to be a big one on earnings calls in the weeks ahead, they said.
However, they said that a "universal" tariff - Trump has proposed a tariff of at least 10% on all imports - would chew more deeply into retailers' gross margins.
"In a universal tariff scenario, we estimate that a company selling products with an average unit cost $(AUC.AU)$ of $10 and retail price of $75 would have to raise prices by almost $2 (3%) to offset the incremental [gross margin] headwind," they said.
But as markets and retailers digest the current trade friction, both BofA and UBS said shares of off-price chains could be safer bets.
"We view off-price retailers as relatively insulated from tariff risk as they primarily source domestically," BofA said.
"In the short term, rising uncertainty probably isn't good for stocks," the UBS analysts said. Thus, they said, investors could shift their money toward names like TJX Cos. $(TJX)$, which owns TJ Maxx, and Burlington Stores Inc. $(BURL)$.
"Furthermore, tariffs likely create meaningful supply-chain dislocation," the UBS analysts said. "This is another reason to buy off-price stocks since these companies typically outperform in times of dislocation."
The White House, in its announcement on Saturday, cited the "extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl" as the reason for the tariffs starting this week. The additional levies, it said, were intended to ensure the three nations addressed those issues. More broadly, the Trump camp has said tariffs would help revive U.S. jobs and manufacturing, or function as a tool to extract trade deals and other concessions that favor the U.S.
But clothing makers, after relying on low-paying labor to pad profits, likely wouldn't want to pay the extra money to shift production back to the U.S., the BofA analysts said.
"Moving manufacturing to the U.S. is not feasible because it requires large capital investment and there is a significant differential in labor costs: Apparel is labor intensive and the minimum wage in Vietnam is only $150-$200 a month," they said.
-Bill Peters
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February 03, 2025 15:44 ET (20:44 GMT)
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