Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The Trump administration announced tariffs on imports to the US that are materially higher than had been expected. This policy has significant implications for apparel manufacturers and retailers as, according to trade associations and other sources, approximately 98% of clothing and 99% of footwear that is sold in the US is imported, primarily from Asia. Indeed, according to the United States Fashion Industry Association, about 60% of US apparel is supplied by just three Asian countries: China, Vietnam, and Bangladesh. These three nations were hit extremely hard by the new policy, as tariff rates were set at 54% for China, 46% for Vietnam, and 37% for Bangladesh. High tariffs were imposed on most other key apparel-sourcing countries in Southeast Asia as well.
We are not reducing our fair value estimates on apparel firms under our coverage at this time given that the duration of the new tariffs is unknown. If the tariffs prove to be short-lived, then we anticipate that the effect on the industry will be small. The Trump administration has frequently announced policies and then reversed them with little effect. If, however, the tariffs are in place for a prolonged period (such as a few months or more), then we anticipate that they will cut into operating margins and require price increases that will reduce demand. There is also the possibility that a trade war will cause a recession in the US and that multinationals will face retaliatory tariffs and trade restrictions in multiple countries.
Many sportswear firms, such as wide-moat Nike NKE and narrow-moats Adidas ADDDF, Lululemon LULU, and Deckers DECK, have very high exposure to the new tariffs, as China and Vietnam are key sourcing countries. It will be impossible for them to avoid the tariffs, especially as Vietnam has become the key producer of technical sports footwear. Even so, Nike trades at a very large discount to our $112 per share fair value estimate and has the financial resources to overcome the near-term challenges.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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