As earnings season progresses amid the ongoing trade dispute between the U.S. and China, two company executives have already noted what tariffs might mean for their firms and for consumers.
On Wednesday, Macy’s Inc. chairman and chief executive officer Jeff Gennette discussed the possible impact on the broadlines retailer during the company’s first quarter earnings call to Wall Street analysts.
Gennette said while the initial “three tranches of tariffs that were enacted in 2018 [had] no meaningful impact on our business” and while the third tranche last Friday that upped the tariff to 25 percent from 10 percent did have some impact on its furniture business, it wasn’t anything that could not be mitigated, as furniture is just one component of its overall business.
The big concern for many analysts who cover the retail and apparel sector is the one that is looming on the horizon: the potential fourth tranche that President Trump has planned, which would place a duty of 25 percent on the remaining $300 billion in goods coming in from China. If that happens, it could come around Labor Day, presuming there’s no resolution to the trade dispute ahead of that time.
The upcoming tariffs are a concern for many retail and apparel firms because it will be the first time apparel will be directly impacted. The volume of the goods to be taxed has many analysts thinking the costs will likely be passed on to consumers. They also expect back-to-school and holiday sales would see the impact through higher prices. What no one knows yet is how willing consumers will be to pay higher prices at stores.
If the fourth tranche takes effect, Gennette said, “that will have an impact on both our private and our national brands.” His team is already reviewing options, such as working with its “manufacturing and brand partners to [analyze] and minimize the impact to our customers.” And while the consumer still appears healthy, given that unemployment is low and wages are rising, the Macy’s CEO did note that the size of the next round of tariffs, when “looking at all those categories and those brands that are included, it is hard to do the math to find a path that gets you to a place where you don’t have a customer impact.”
As for how to minimize the impact to consumers, Gennette said Macy’s would look at two different business paths. The first, representing 20 percent of its business, is the private brands category where the retailer does its own sourcing. Although the company has been moving production out of China, it’s still an “important piece of our overall mix within China,” the CEO said, noting that Macy’s has been working with its manufacturing partners to improve scalability.
The other component centers on its negotiations with national brand partners, which Gennette said has the retailer “working very closely with them on the potential impact to our shared customers.” He did note that it was too early to comment on what it all might mean regarding “potential price increases, and what categories are going to be more affected than others.”
In a post-earnings telephone interview with Victor Luis, Tapestry’s CEO, he said the impact thus far, even with the most recent tariff increase, has been “minimal.” The company has been moving production out of China for some time. And while the existing tariffs have included handbags since last fall, Luis said “only 4 percent, thereabouts, of our handbags now come from China.”
For Tapestry, it’s also the impending round of tariffs that would be more impactful on the company. Because of the extension to other categories such as ready-to-wear, Luis said the “impact on us would be more substantial. We’re constantly looking to diversify our sourcing, our vendor partners across other markets.”
Unlike Macy’s, which targets a broader pool of consumers across different income ranges, Tapestry is focused on the aspirational luxury consumer. And while there’s an argument to be made that the existing customer base might pull back on spending or move down the retail hierarchy to another distribution channel, it’s just as plausible as Luis noted that the high-end luxury shopper does the same, putting a Coach or Stuart Weitzman in their line of sight.
“It is very hard to predict consumer behavior across categories. Some will move from expensive to less expensive brands. If that happens, we may have some winners….Unfortunately if the new duties come to bear, [we’ll] take it day by day and adjust accordingly,” Luis said.