- Stocks plunged on Monday after China announced it would slap tariffs on US goods in response to higher US duties on Chinese goods.
- Fashion stocks including Victoria’s Secret-owner L Brands, Gap, and Abercrombie & Fitch were among the biggest decliners due to their dependence on Chinese suppliers and consumers.
- Markets Insider looked at the exposure of seven fashion stocks to the US-China trade war.
- Watch L Brands, Tapestry,Abercrombie & Fitch, Guess?,Ralph Lauren, Tiffany’s, and Gap trade live.
US stocks plunged on Monday after China announced it would slap tariffs on $US60 billion of US goods starting in June. The move was in retaliation to the Trump administration raising duties to 25% on $US200 billion worth of Chinese products last Friday, and threatening to expand tariffs to a further $US300 billion of goods within the next month.
Fashion companies including Victoria’s Secret-owner L Brands, Tiffany & Co., Abercrombie & Fitch, Guess, Ralph Lauren, Gap, and Tapestry – which owns Kate Spade and Coach – saw their shares plummet more than 5%.
Here’s why investors are worried about those companies:
L Brands stock is under pressure because investors fear higher tariffs will increase the costs of shipping merchandise to and from China, forcing the company to raise prices. The trade war could also hurt consumer confidence and damage the American and Chinese economies, reducing demand for lingerie and bath bombs.
The owner of Victoria’s Secret, Pink, and Bath & Body Works has been investing in China and considers it an “extremely important market,” according to a company filing in April. It imports a significant proportion of its products from there too; the Asian nation is one of the five countries where almost all of L Brands’ suppliers are based, according to its website.
There were a total of 53 Victoria’s Secret and Victoria’s Secret Beauty and Accessories stores in Greater China as of February 2, and management planned to open up to 15 more in the region this fiscal year, according to its latest earnings presentation.
A combination of more stores and strong demand in Greater China lifted net sales in L Brands’ international business by 20% to $US605 million in the year to February. However, the segment only accounted for 6% of the company’s $US13.2 billion of revenue, meaning the group isn’t too reliant on sales in the region.
Tapestry’s stock has dropped because the owner of Kate Spade and Coach is targeting Chinese shoppers and has warned the trade war is a threat to its business.
The group expects “minimal impact” from the tariff hike last Friday, according to its third-quarter earnings. However, it warned that expanded tariffs – which the Trump administration is already preparing – could have a “more significant impact” on its performance. It added that further escalation could hurt its ability to “grow its business with the Chinese consumer globally” – a key part of its current strategy.
Tapestry earned $US672 million or about 15% of its revenue in Greater China – which includes mainland China, Hong Kong, Macau, and Taiwan – in the nine months to March 30. The group also acquired its Stuart Weitzman distributors in Southern and Northern China and took control of its Kate Spade joint venture in mainland China, highlighting its current focus on the region.
3. Abercrombie & Fitch
Abercrombie & Fitch stock is suffering because of the company’s reliance on Chinese suppliers.
The apparel retailer sourced about 36% of its merchandise through China last fiscal year, and imported 25% of all merchandise to the US from China, according to its latest earnings report. Recognising its vulnerability to tariffs, management plans to reduce that second figure to below 20% this fiscal year. They also believe they can shift up to half of their production out of China if necessary.
A&F sees growth opportunities in Asia and Europe, but has warned the trade war could hinder its international expansion. The group earned about $US487 million – around 14% of total net sales – outside of the US and Europe last fiscal year. The majority of that probably stemmed from China, given 29 of the company’s 57 stores outside the US and Europe were located in the Asian nation as of March 27.
Guess shares have fallen because higher tariffs threaten to weaken its robust Asia Pacific business.
The apparel retailer expanded from 862 stores and concessions in Asia Pacific to 894 in the year to February, according to its full-year earnings report. More outlets helped to drive sales in the region up 26% to $US388 million last fiscal year, outpacing growth of less than 15% in all other regions. Management highlighted accelerating sales and e-commerce momentum in China as key drivers.
“China and Japan are hugely important markets for us with huge white space,” CFO Sandeep Reddy said on the group’s fourth-quarter earnings call in March. An economic slowdown in China could throw cold water on the group’s ambitions.
Ralph Lauren shares have dropped as the US-China trade war threatens to curtail growth in China and Asia more broadly.
The clothing company opened 39 stores in China – its fastest-growing market – last fiscal year, CEO Patrice Louvet said on the full-year earnings call this week. New stores in Shanghai, Beijing, and other Chinese cities drove constant-currency sales in mainland China up more than 30%, sending Greater China revenue up 20%.
Overall Asia revenues of just over $US1 billion represented 16.5% of turnover, up from 15% a year ago, according to Ralph Lauren’s full-year earnings report. The rising proportion of revenue earned in the region highlights its growing importance to the group.
Tiffany & Co.
Tiffany & Co. shares are under fire because a prolonged trade war could tarnish sales to Chinese shoppers, some of the company’s best customers.
The jeweller generated about 17% of its net sales in Greater China last fiscal year, according to its full-year earnings report. It had 33 stores in China at the end of January, more than in any other Asian country. Strong demand in China drove its Asia-Pacific sales up 13%, and its planned launch of a local e-commerce website this year could fuel further growth.
Unsurprisingly, management has called out the US-China trade war as a risk to the business. An economic slowdown in China could hurt sales and profits at stores in Greater China, as well as stores in other territories that serve Chinese tourists.
Chinese consumers spend more on average than Americans, Europeans, and other shoppers, CEO Alessandro Bogliolo said on the group’s full-year earnings call. They are “big lovers of gold and platinum, especially with diamonds,” he said, pointing to “very strong” sales of engagement rings to them.
If the Chinese economy weakens, their taste for Tiffany’s bling could sour.
Gap’s shares have suffered because of the company’s dependence on Chinese vendors.
The owner of Gap, Old Navy, and Banana Republic made around 21% of its purchases last year from factories in China, according to its full-year earnings report. Higher tariffs on Chinese imports to the US could ramp up its costs and reduce its profits.
Gap highlighted China as a growth market on its fourth-quarter earnings call. Although it doesn’t break out sales for the country, it increased the number of Gap stores in Asia by 19 to 332 last fiscal year, suggesting it’s deepening its footprint in China.
However, Gap’s Asia revenues amounted to $US1.2 billion last fiscal year, or about 7% of overall turnover, meaning its business in the region remains relatively small.
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