Retailers, Brands Brace for Trade War Impact by Diversifying Sourcing
As the latest round of tariffs on Chinese imports continues to unsettle the fashion apparel industry, analysts at Telsey Advisory Group said in a report today that the impact will vary based on how exposed companies and brands are, as well as how nimble they are in diversifying their sourcing.
The 25 percent tariff on about $200 billion of goods is the second round of the trade war between the U.S. and China. Round four will likely involve about $325 billion worth of products, and will hit the market this summer, the TAG researchers said, adding that the costs will vary by sector.
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Dana Telsey, chief research officer of the firm, said apparel manufacturers and brands “with the highest exposure to the department store channel could see the greatest impact from an uptick in tariffs.”
“Apparel manufacturers may be more nimble relative to footwear companies in their ability to shift production out of China,” Telsey noted. “We see the highest tariff exposure in G-III [estimated at around 60 percent], while Ralph Lauren [estimated at around 25 percent of products] is less exposed. G-III had previously indicated that 10 percent of its volume was subject to the 10 percent tariff on an annual basis and can work their way through this by further diversifying sourcing, seeking price concessions from overseas vendors, and selectively raising prices.”
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TAG analysts said while the footwear industry has dodged the most recent round of tariffs, the sector is “exposed” to the expected fourth round this summer. “Footwear manufacturers would likely follow the same playbook as apparel manufacturers in dealing with tariffs by diversifying production, negotiating vendor concessions, and taking price increases,” analysts at the firm said in their report. “We have seen this with accessories manufactured by footwear companies, which have been able to largely mitigate the impact of the 10 percent tariff. We expect the near-term impact of a tariff on footwear to weigh more heavily on margins as pricing and shifting supply out of China would take time.”
TAG cited Steve Madden as being most exposed to a fourth round due to the brand’s 54 percent of products being sourced in China. Deckers is also at risk with 33 percent of products sourced in that country.
For specialty retailers, TAG said exposure to Chinese-sourced goods averages about 30 percent. The analysts said retailers in this segment have shifted their sourcing from China over the past few years. “While handbags and leather goods are subject to the current tariff regime that recently increased to 25 percent from 10 percent, exposure to China for that product category is fairly minimal at both Tapestry Inc. and Capri Holdings Ltd., by our estimate [below 5 percent],” TAG said.
“On the apparel side, if punitive 25 percent tariffs were to be put into place across Chinese exports, Lululemon [12 percent sourced from China] and The Children’s Place [approximately 15 percent from China] are well-positioned from a sourcing perspective to minimize the impact,” the analysts said.
For department stores, the approach requires diversification of private label sourcing. “Being a step removed from manufacturing in China could help buffer both department stores and off-pricers on the margin front from any potential tariff impact,” Telsey said. “Both department stores and apparel manufacturers have stated they would work together to determine how best to approach price increases. For department store’s private label goods, we believe they will take a similar approach to apparel manufacturers including diversifying its sourcing, negotiating with vendors and taking price increases.”
The TAG analysts said department stores have previously stated that there is minimal impact from the current 10 percent tariff. “We believe J.C. Penney could be most exposed to tariffs given its high private label penetration [estimated at 46 percent] and more price sensitive customer,” the TAG analysts said.
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