The Chinese Tariff Fallout On U.S. Retailers

This year alone, retailers have discussed Chinese tariffs in 166 earnings calls, and that might just be the beginning. The Chinese government announced its retaliation on Aug. 23, saying tariffs will be imposed on American goods, including apparel, textiles, agriculture, and chemicals.

This announcement is weighing on retail stocks globally and continues to fuel a trade war between China and the U.S. And now tariffs are having a deep effect on both countries.

Retailers Booming in China

The retailers reporting Q2 earnings this month have been vocal about their popularity in China. Walmart said during its Q2 earnings call that the Chinese consumer loves their Sam’s Club format and posted double digit comps growth.

Nike’s leadership has been bullish on China given the business boom and popularity there. In the latest earning call, Nike said Greater China grew 22%, which marks the 20th consecutive quarter of double-digit growth in China. “NIKE Digital grew 37% in Q4, fueled by the SNKRS App and the strength of NIKE Brand and experiences with partners such as Tmall and WeChat. For the full year, revenue in Greater China increased 24% on a currency-neutral basis. On a reported basis, FY ’19 revenue was up 21%” (Source: Nike Earnings Call, June 27, 2019).

China’s business accounts for almost 16% of Nike’s total revenue (Exhibit 1). New tariffs on American retailers means higher prices and a possible threat to revenue and earnings growth going forward. Wall Street analysts are paying attention.

(Click on image to enlarge)

Exhibit 1: Nike’s Geographic Revenue 

Source: Eikon

Since the discussions around tariffs have heated up this year, analysts polled by Refinitiv have become more bearish on Nike and lowered earnings estimates (Exhibit 2). The StarMine ARM model is highly predictive of both the direction of future revisions and stock price movement. In the first quarter of 2019, Nike scored a 95 out of a possible 100, suggesting that analysts were bullish on the retailer. Today, however, that score has dropped to 30, suggesting that analysts polled by Refinitiv are likely to continue revising earnings and revenue downward.

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