On Tuesday, Bernstein, a prominent financial research firm, provided insights into the potential effects of a 10% increase in import tariffs on China for the global apparel, footwear, and accessories industry.
According to Bernstein's analysis, large global brands are expected to experience a minimal impact on their profit and loss statements due to their diversified supply chains and international market presence, which includes sales in China itself.
These brands have been reducing their reliance on Chinese manufacturing over the past decade and have developed supply relationships in various other markets. This strategic shift allows them to quickly adjust their supply chains and increase production outside of China when necessary.
Looking at Tapestry (NYSE:TPR) as an example, InvestingPro data shows the company maintains strong financial health with a "GREAT" overall score, supported by a robust current ratio of 4.93, indicating solid ability to manage potential supply chain disruptions.
The analysis highlighted that while the first-order impact on these large brands would be less than 50 basis points on margins, smaller and mid-sized brands could face a substantially larger effect, with the margin impact potentially exceeding 200 basis points. These smaller entities are more dependent on China for their supply and lack alternative demand markets outside the United States to which they could redirect their Chinese-made products.
Moreover, with longer order lead times and scarce supply chain relationships outside of China, these brands could take over a year to pivot away from Chinese suppliers and establish new production avenues elsewhere. For context, larger players like Tapestry maintain impressive gross profit margins of 73.91%, demonstrating their ability to better absorb potential tariff impacts.
Bernstein also pointed out potential second-order effects, such as cost-of-goods-sold (COGS) inflation across supply markets due to the shift away from Chinese production. This inflation is expected to place further margin pressure on the sector, particularly affecting smaller brands. Larger brands, however, might have more leverage to mitigate these pressures.
A less likely but more consequential impact could be a demand-side backlash within China against Western brands, which would significantly harm sales and profits for brands with substantial exposure to the Chinese market.
For the large global brands covered by Bernstein, the anticipated slight increase in gross margins from tariffs could be accompanied by a further slight rise due to broader COGS inflation. However, these increases in costs are likely to be balanced by market share gains as these large brands take business from smaller competitors that are compelled to raise prices to compensate for the margin squeeze.
The research underscored that the most significant risk for China-exposed brands, including companies like Nike (NYSE:NYSE:NKE), Adidas (OTC:ADDYY) (ETR:ADS), Lululemon Athletica (NASDAQ:LULU), Tapestry (NYSE:TPR), and Capri Holdings (NYSE:NYSE:CPRI), is the possibility of a severe backlash from Chinese consumers, although this scenario is deemed less probable.
Notably, Tapestry has shown remarkable resilience with a 74.24% year-to-date return, and according to InvestingPro, the company has 15+ additional key insights and metrics available, including detailed analysis of its market position and growth potential. Get access to the comprehensive Pro Research Report covering what really matters about TPR and 1,400+ other top stocks.
In other recent news, a Bernstein analyst has noted a positive start to the fourth quarter for U.S. apparel retailers, including TJX Companies Inc (NYSE:TJX)., Canada Goose Holdings Inc (NYSE:GOOS)., Macy's Inc. (NYSE:M), Abercrombie & Fitch Co., and Five Below Inc (NASDAQ:FIVE). This performance is attributed to a later than expected drop in temperatures, benefiting brands with higher average unit retail and higher-margin seasonal categories.
Internationally, companies like Tapestry, Ralph Lauren Corp (NYSE:RL)., TJX, Canada Goose, and PVH Corp (NYSE:PVH). are seeing strong performance in the EMEA and APAC regions.
In related developments, BofA Securities has reaffirmed a Buy rating on Tapestry Inc., increasing the price target from $65.00 to $75.00 following the completion of a $2 billion accelerated share repurchase agreement. Tapestry also recently priced two senior unsecured notes offerings, intending to use the proceeds to repay borrowings and cover general corporate expenses.
S&P Global Ratings has revised Tapestry's financial outlook to stable from negative, anticipating the company to maintain leverage in the high-1x area over the next year. Meanwhile, TD Cowen has maintained its Hold rating on Tapestry, citing the success of the Coach brand in defying negative industry trends.
Baird has also maintained its Outperform rating on Tapestry, increasing the price target to $64.00 from $58.00, following the termination of a potential deal and the unveiling of a $2.8 billion stock buyback plan.
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