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Are Apparel Makers' Tariff Concerns Warranted? 5 Great Picks

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The apparel and footwear industry are the latest to voice their concerns over President Donald Trump’s plans to impose tariffs on goods imported from China, as these will result in higher consumer prices. The U.S. government is apparently preparing to impose tariffs on Chinese information technology, telecommunications and consumer goods in order to force changes in China’s intellectual property and investment prices.

Tariffs mean higher prices of products and this invariably has sparked fear among retailers, apparel manufacturers and shoemakers, as many of these companies rely on imports. Apart from a number of U.S. retail giants, the American Apparel and Footwear Association (AAFA) and as many as 82 footwear companies wrote a letter to the White House objecting to the tariff.

However, the apparel and footwear industry, particularly men's and boys' apparel wholesaling, has been witnessing steady growth over the past five years and is expected to continue performing well in the days to come. Moreover, a recovering economy, increasing consumer confidence, wage growth and higher purchasing power have stimulated consumer expenditure on discretionary industry products, resulting in higher revenues for the companies.  Given this scenario, it makes for a good time to invest in apparel and footwear stock.

Apparel Manufacturers, Shoemakers Oppose Tariffs

The heavily China-reliant U.S. shoemakers and apparel manufactures have joined retailers in lobbying against Trump’s proposed tariffs on goods imported from that country for fear of an inordinate flare-up in prices of these consumer discretionary goods.

In fact, Washington could impose more than $60 billion in tariffs on goods ranging from apparels to footwear, electronics and toys. Analysts are of the opinion that any additional broad-based tariff means burdening the American working families as they will have to pay higher prices for household basics like clothing, shoes and electronics.

Not only apparel and shoemakers but also the entire U.S. fashion industry is worried about the proposed tariffs. In fact, the recent imposition of 25% and 10% tariffs on imported steel and aluminum too is going to hit the apparel and footwear industry.

Steve Lamar, executive vice president of the AAFA remarked that imposing tariffs on imported items ultimately passes on the tax on to consumers. “There is a direct cost that rolls into our industry. It is not like the can industry or the auto industry, but it is there,” he said, adding that manufacturers, retailers and importers purchase trucks to haul merchandise and manufacturers package their goods in aluminum cans.

Moreover, most shoemakers feel that footwear is already subject to hefty tariffs and more tariffs on top of this burden would only result in higher prices and fewer U.S. jobs.

That said, the footwear and apparel industry has been performing well for a while now and tariff fears might be a bit overblown, more so because a strong lobby is showing aggressive opposition. Moreover, a recovering economy and higher wages are always an indication of increasing disposable income. So it might bit a too early to press the panic buttons.

Steady Growth of Apparel and Footwear Industry

The U.S. apparel and footwear industry has witnessed steady growth over the past few years. Especially, the men’s and boy’s apparel wholesaling industry has seen remarkable growth in the last five years and the trend is expect to continue in the future.

The primary driver of this steady growth has been a recovering economy, which has seen an increase in consumer confidence and rising disposable income, resulting in higher consumer spending on consumer discretionary products from the apparel and footwear shelves. Moreover, an appreciating dollar and a continuing decline in cotton input prices for upstream manufacturers have combined to lower industry purchase costs, resulting in higher gains for the industry.

Moreover, increasing wages and strong gains in per capita disposable income are expected to encourage more consumer expenditure on consumer discretionary products. 

Our Choices

Despite tariff-induced concerns and the ensuing agitation, it is a bit too early to be apprehensive, especially since apparel manufacturers and shoemakers have been performing well for the last few years. Plus, a recovering economy, robust confidence, increasing wages and higher disposable income hint at the industry’s steady growth over the next five years.

Adding apparel and footwear stocks to your portfolio looks like a smart option at this point. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good VGM Score and Zacks Rank.

Abercrombie & Fitch Company (ANF - Free Report) launched an integrated campaign for its Abercrombie & Fitch brand, marking the start of its holiday season. Entitled 'This is the Time', the campaign draws from the brand's heritage of adventure and exploration, and taps into its core 21-24-year-old target customers' focus on experiences.

Abercrombie & Fitchhas a VGM Score of B. The company has an expected earnings growth rate of more than 4.8% for the current year. The Zacks Consensus Estimate for the current year has improved 30.3% over the last 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. (BOOT - Free Report) operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories.

Boot Barn Holdings has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has an expected earnings growth rate of more than 27.3% for the current year. The Zacks Consensus Estimate for the current year has improved 30.8% over the last 60 days.

The Gap, Inc. (GPS - Free Report) is a leading global apparel retail company. Gap offer apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands. 

Gap has a Zacks Rank #2 and a VGM Score of A. The company has an expected earnings growth rate of more than 23.5% for the current year. The Zacks Consensus Estimate for the current year has improved 14.2% over the last 30 days.

Nordstrom, Inc. (JWN - Free Report) is a leading fashion specialty retailer offering compelling clothing, shoes and accessories for men, women and children.  

Nordstrom has a Zacks Rank #2 and a VGM Score of A. The company has an expected earnings growth rate of more than 15.6% for the current year. The Zacks Consensus Estimate for the current year has improved 9.2% over the last 30 days.

Zumiez Inc. is a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through fashion, music, art and culture of action sports, streetwear, and other unique lifestyles.  

Zumiez has a Zacks Rank #2 and a VGM Score of A. The company has an expected earnings growth rate of more than 39.1% for the current year. The Zacks Consensus Estimate for the current year has improved 9.7% over the last 30 days.

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