Shares of G-III Apparel (GIII) and Steve Madden (SHOO) are under pressure on Tuesday after Piper Jaffray analyst Erinn Murphy downgraded the stocks to Neutral, pointing out that both companies produce a large amount of their goods in China. With China retaliating the 25% tariff on $200B of Chinese imported goods with its own $60B shot across the bow, Cowen analyst Oliver Chen said he sees the most potential vulnerability at apparel and department store retailers. The analyst added that negative earnings per share impact could be (10%)-(30%) or worse as retailers are unlikely to be able to pass on all of potential cost of goods sold increases.
MOVING TO THE SIDELINES: As tariff rhetoric accelerates across her global lifestyle brands group, weighing on names that have large U.S. businesses and a disproportionate share of production in China, Piper Jaffray's Murphy downgraded Steven Madden and G-III Apparel to Neutral from Overweight. While she acknowledged that both management teams are "resourceful, have strong relationships with their retailers and have already made meaningful progress diversifying production in China," the analyst noted that they still produce a large amount of their goods in China. Murphy sees existing tariffs impacting second half of the year earnings, and believes that even if there is tariff relief in the next month, there might not be a full recovery of the multiples.
Overall, while both vendors likely can increase pricing to some extent, the analyst believes their overall exposure to China and recently proposed tariffs to the apparel/footwear categories will weigh on their multiple. Murphy also lowered her price target on Steven Madden's shares to $32 from $38 and her target for G-III’s stock to $35 from $43.
OUTSIZED TARIFF RISK: Noting that 34% of apparel and about 70% of footwear imported into the U.S. come from China, Cowen analyst John Kernan told investors that he believes 25% tariffs on apparel and footwear will create "major disruption" at a time when companies are already facing accelerating disruption from technology and Amazon (AMZN). The analyst, who thinks diversifying from China sourcing will be slow, said he views G-III Apparel, Skechers (SKX), Carter's (CRI), PVH Corp. (PVH) and Ralph Lauren (RL) as among the apparel stocks with outsized earnings per share risk. He added that he thinks companies like Under Armour (UAA), that may have lower than sector average exposure to China sourcing but also have lower EBIT margins, are faced with greater sensitivity to higher cost of goods.
EPS CUTS, HIGHER CUSTOMER PRICES: Amid the U.S./China trade battle, Cowen's Chen told investors in a research note of his own that negative earnings per share impact could be (10%)-(30%) or worse as retailers are unlikely to be able to pass on all of potential cost of goods sold increases. The analyst believes Planet Fitness (PLNT), Walmart (WMT), Ulta Beauty (ULTA), LVMH (LVMUY), and Costco (COST) could be the best positioned as these have lower China sourcing risk and greater scale. Overall, he noted that he sees the most potential vulnerability at apparel and department store retailers. Chen also argued that consumers could experience price increases by as much as 10%-15% across impacted categories, which would yield up to $100B or more of incremental cost to consumers, depending on the breadth and depth of goods impacted. These factors are likely to impact supply/demand planning for back to school and holiday, he contended.
WHAT'S NOTABLE: Also commenting on the 25% tariff on $200B of Chinese imported goods in effect and now China retaliating with its own $60B shot across the bow, Wedbush analyst Daniel Ives noted that semiconductor names such as Nvidia (NVDA), Intel (INTC), and Micron (MU) among others represent clear worries that a potential supply chain disruption could be in the cards along with higher component costs being passed down the tech ecosystem and thus softening demand globally.
While many U.S. companies are impacted by this latest trade tension, the "poster child for the U.S./China UFC battle" continues to be Apple (AAPL), he contended, with fears running rampant that the latest tariffs could significantly increase the cost of iPhones globally. Based on his analysis, Ives believes the cost of making iPhones will go up by roughly 2%-3%. However, if the Trump administration decides to levy a tariff on the additional $325B of Chinese goods over the coming weeks/months this would be "more of a potential game changer" from the perspective of the incremental costs to Apple and its iPhone production with expenses that could escalate by roughly 10%-plus over time. He reiterated an Outperform rating and a $235 price target on Apple shares.
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