President Trump’s Proposed Tariffs Could Hurt Retail Stocks and the American Consumer
Investors should be worried about the fashion retail sector. Express, Inc. (NYSE:EXPR) and Guess?, Inc. (NYSE:GES) have delivered poor results. Express stock dropped some 20% and Guess? stock lost some 10%. The American consumer could be heading toward a familiar but forgotten obstacle: much higher tariffs on imported goods. Express and Guess? might be just the first symptoms.
Even if shoppers may flock to stores now, investors looking at the long term fear Trump’s tariff plans, which could discourage investors from the retail sector altogether.
Donald Trump might execute plans to repeal free trade agreements with Mexico and slap bigger duties on Chinese goods. The American consumer should be cautious, because such a move would increase the cost of just about everything. Poor sales have already shown what happens: that’s why Express and Guess? stocks have dropped. But they could drop further still, if Trump scares away the American consumer with tariffs.
Trump warned during his presidential campaign that he favors charging a 35% tariff on Mexican-made products and a 45% tariff on Chinese imports. The idea is to protect American jobs from foreign competition, but the result is that the American consumer gets stiffed. (Source: “For Americans, Trump’s tariffs on imports could be costly,” NEWS 1130, December 1, 2016.)
American Consumer Strength in Short Term Does Not Equate to Being Bullish on Retail
The strength of the American consumer will emerge more clearly after the holiday season sales figures are tabulated. But, for now, the signs from retailers—fashion ones at least—are not optimistic. Specialty clothes retailer Express stock took a big hit.
Dismal sales numbers suggest that the chain has not found the right formula to draw shoppers into its stores. Express offered up “depressing” expectations. It forecasts adjusted earnings per share (EPS) of $0.78-$0.82. That’s more than 25% less than the previous guidance of $1.00-$1.14 per share. Express’s Q3 earnings year-over-year were less than half last year!
Guess? stock also fell sharply. It could drop much further because its revenues grew by only three percent instead of the five percent that analysts expected. More alarming was the 25% lower earnings. Like Express, Guess? has also revised its guidance downward.
The only favorable note was the increased sales that both companies, especially Express, saw online. If there is a pattern, it’s that retail could experience another bad year, possibly even worse than 2016—at least for fashions and clothing.
Investors should be especially cautious because of traditional trading patterns. The Christmas period has typically brought retailers the best sales figures of the year. But seasoned investors know that historically, retail stocks perform badly. (Source: “Here’s a Black Friday play as retail stocks take a different turn,” MarketWatch, November 25, 2016.)
The performance of Express stock and Guess? stock this year raises an unusual problem. Should investors take a cautionary attitude, treating GES and EXPR stocks as the proverbial canaries in the coal mine? In other words, does their lackluster performance represent a reasonable cross-section of how retail stocks will perform, or is it a case of the traditional pre-holiday season retail stock blues?
The market appears to be pointing to considering more cautious attitudes. TJX Companies Inc (NYSE:TJX), which is an off-price retailer, has outperformed other more traditional retail stocks. J C Penney Company Inc (NYSE:JCP) missed on earnings last month, cutting its outlook in the process. The company cited weaker retail sales.
The only good news is coming from general department store retailers like Macy’s Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN). Express and Guess? are more specialized retailers. But, even if sales are good, investors, especially long-term ones, should start factoring in the effects of Trump’s foreign tariff policies. Should he go through with the tariffs, it could prompt a retail collapse.