You will be redirected back to your article in seconds
Skip to main content

Tariffs on Chinese Apparel and Footwear Would be “Credit Negative” for US Companies, Moody’s Contends

With the threat of $500 billion in tariffs on a wide range of Chinese goods looming, a new Moody’s study said tariffs would be a “credit negative” for the U.S. apparel and footwear sector, as they would increase costs of goods sold for the U.S. divisions of companies that import goods from China.

More than half the revenues of large U.S. apparel companies could be affected, according to Moody’s. The overall impact would depend on how much of a company’s goods are sourced in China, how quickly they can diversify their sourcing, how much pricing flexibility is built into their products, how firms might adjust product designs or how much they can cut costs elsewhere to absorb the increased tariffs.

The study said companies that sell a greater percentage of imported Chinese goods in the U.S. would take the biggest hit on profits if the proposed tariff increases are implemented.

“We expect these companies to experience more margin and earnings pressure until they can adjust their cost base and sourcing locations, which may take time given their sourcing concentrations in China,” Moody’s said. “Apparel and footwear companies have been prudently diversifying their sourcing away from China over the past several years in response to rising labor costs. They have also been moving production closer to their end markets.”

If the tariffs are imposed—there are efforts in Congress to curtail President Trump’s threat—companies would likely experience gross margin pressures for one to two years, Moody’s said, as it will take time for most to further diversify operations away from China or adjust costs.

Related Stories

“There are long lead times in the production cycle and it can take time to work through potential limitations in apparel and footwear manufacturing capacity in other countries,” the study said. “Nevertheless, we think companies do have levers they can pull to mitigate at least part of the cost.”

Roughly 58 percent of combined revenue of large rated U.S. apparel manufacturers is derived in the U.S. and potentially at risk of increased tariffs, Moody’s noted. Companies like G-III Apparel Group, which generated around 88 percent of its 2017 revenue in the U.S. and purchased around 65 percent of its 2017 inventory from China, could feel the impact. Others that would likely “take a hit” include footwear firms Caleres, Payless and Wolverine World Wide. Moody’s said Caleres derived 94 percent of 2017 sales in the U.S., while about 68 percent of the footwear it sourced came from manufacturing facilities in China.

Levi Strauss & Co. and VF Corp., on the other hand, “are well positioned from a diversity standpoint,” Moody’s said, with less than 20 percent of their product sourced from China. Most companies will look to pass at least some of the added cost to customers, particularly on premium products where the consumer may have less price sensitivity.

“Larger companies with stronger margins and balance sheets, such as Wolverine and PVH Corp., could decide to absorb higher costs in an effort to gain market share,” Moody’s said.

On July 10, the Office of the U.S. Trade Representative released a list of $200 billion worth of Chinese goods imported into the U.S. that could be subject to an additional 10 percent tariff. The list includes certain apparel accessories like handbags and leather gloves, textiles and yarns, leathers and cotton.

Apparel and footwear were mostly excluded from the list likely because they are already among the highest taxed U.S. imports. But last week, Trump indicated that he was considering slapping tariffs on all goods imported from China, including all apparel and footwear.

According to Moody’s, apparel and footwear companies have been “prudently diversifying” their sourcing away from China over the past several years in response to rising labor costs toward countries like Bangladesh and Vietnam, and moving production closer to their end markets, to regions like Central and South America and the Caribbean.

The threat of new tariffs extends far deeper into the industrial and consumer markets, which, according to Moody’s “means this isn’t just about whether or not these companies will be able to pass just their own higher costs to the U.S. consumer.” It also raises the issue of what the impact could be on consumer spending power.

“Revenue growth for U.S. apparel companies could also take a hit if China imposes regulatory or other such impediments on U.S. companies or if local consumers turn away from U.S. brands,” Moody’s added. “It is important to remember that China remains a key growth market for global apparel companies. For example, Nike Inc. reported 18 percent growth in the country during its latest fiscal year.”