Markets have been anticipating US tax reform since early in the 2016 election cycle. In fact, a linchpin to the “Trump Trade” was the expected growth acceleration due to revamping of the US tax code. Following Saturday's 51-49 vote in which Senate Republicans passed a sweeping overhaul of the US tax system, it looks as if the US will change after three decades of stagnation. Early analysis of the bill indicates that corporations and the wealthy will benefit most from tax reform.
The US retail sector has suffered under pressure from e-commerce and international competition, which has captured staggering markets share in a short period of time. Loss of market share made the sector one of the worst performers in 2016 and 2017. Along with macro factors hurting US retail, "brick-and-mortar" stores suffer from some of the highest effective tax rates with domestic sales pushing rate towards 35% or more. Tax reform will obviously help boost corporate earnings, especially for the many companies with high tax rates. A decrease in the corporate tax rate from 35% to either 25% to even 15% will be significant in preserving income and cash. The saving could be redirected to investments and inventory updates to compete with online retailers.
Nordstrom (NYSE:JWN) is strapped with one of the highest corporate tax rates, near 40%. Reduction in the corporate tax rate is estimated to create savings of $100-$150 million depending of final rate. A sizeable re-circulation of capital will go far in allowing corporate strategy to expand, update and innovate. Savings of this level will lift net income and EPS allowing for improve valuations in the short term and support for corporate strategic initiatives in the long term.
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