The Chinese Tariff Fallout On U.S. Retailers

Still, Nike’s earnings are of good quality. According to the StarMine Earnings Quality model, the company scores a 96 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow and operating efficiency components also suggest the company is a top performer in these areas. This underlines Nike’s strength and also means that they have the financial power to execute properly during a trade war.

Exhibit 2: StarMine Analyst Revisions Model for Nike

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Source: Eikon

However, not all retailers have Nike’s financial strength, and despite their popularity in China, imposed tariffs could be damaging to their bottom line. Other retailers driving revenues in China including Tiffany’s, Tapestry, Canada Goose and Abercrombie & Fitch, Guess, Ralph Lauren, and Urban Outfitters are likely to take a direct hit from tariffs (Exhibit 3).

Exhibit 3: Q2 2019 Same-Store Sales Actuals and Estimates for Vulnerable Retailers in China

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Source: I/B/E/S data from Refinitiv

More Negative Guidance

Most retailers in the U.S. are concerned about the higher costs associated with the tariffs. Since most apparel bought in the U.S. is made abroad (mostly in Asia), the trade war will make buying clothes in the U.S. more expensive. When looking at our earnings guidance data, the apparel sector has the most negative guidance. U.S. customers can’t just switch to an American manufacturer – there simply aren’t many of those around anymore. So higher-cost imports will either hurt retailers’ margins, or if they pass the costs onto consumers, cut into demand.

One highlight this earnings season was Walmart. The discounter reported another stellar financial quarter, and raised its earnings guidance – a bold move in a time when the bulk of retailers are providing negative guidance.Retailers are reporting Q2 earnings and discussing China tariffs, and warning us not to expect much from them in the upcoming quarters. To date, there have been 23 negative EPS preannouncements for Q3 2019 compared to 9 positive preannouncements. Accordingly, analysts polled by Refinitiv have been lowering Q3 estimates.

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