Apparel retailers could be the hardest hit by tax proposals by the Trump administration

Apparel retailers could be the hardest hit by tax proposals by the Trump administration

Whatever plan Donald Trump puts in place to force businesses to produce more in the U.S., apparel retailers will be hit harder than most other industries

Retailers are in perpetual price competition with their traditional competitors while investing heavily to fight off a growing crowd of internet rivals, many of which operate at a loss to gain market share. And they import nearly everything they sell.

President Trump, despite his criticism of the proposal, could go ahead with a Republican tax reform plan that would tax imports by making them non-deductible expenses, and exempt exports. He has also pushed a still-vague plan to impose 35% levy on goods made by companies that shift production out of the U.S. and then sell back in. Both proposals would hit importers.

If he does pick a border-adjusted tax plan with a corporate tax rate of 22.5%, then 2017 earnings would be 68% lower at Kohl’s, 52% lower at Urban Outfitters and 37% lower at Lululemon, according to Citigroup. Abercrombie & Fitch, Gap and J.C. Penney would lose money. Some economists say the effects of the measure would be offset by a rise in the dollar and across-the-board increases in the prices of imported goods, but companies that are net importers aren’t buying it.

Retailers would have to raise prices to return to reasonable profitability. Yet they are marketing to U.S. consumers who are hooked on cheap apparel. In December, the consumer price index for apparel stood slightly below where it was in December 1990. Taking inflation into account means prices have fallen significantly.

Retail Table

If costs go up but consumers won’t pay more, the relative winners would be the retailers with the greatest leverage over their suppliers, according to Instinet analyst Simeon Siegel.

Larger companies such as Wal-Mart Stores, Amazon.com and Macy’s might have an easier time forcing their suppliers to shoulder some of the burden than smaller players like Urban Outfitters and American Eagle Outfitters. And discounters such as TJX Cos. and Ross Stores, which sell clothing that hasn’t sold in other channels, may be more sheltered from the tax’s effects because of their place in the apparel food chain.

Outside of the high-margin luxury business, the only retailers that might be able to get away with raising prices are the few whose brands consumers can’t live without. Nike may fall into that category, as could Lululemon, although the latter’s high prices have already made it a target of lower-priced imitators.

Either way, Mr. Trump’s goal of boosting jobs in the U.S. would cause serious turmoil in the apparel industry, already one of the most treacherous in the market. Investors will have to be even more careful where they shop.

www.wsj.com

 


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