October 30, 2024 • 19 mins
The US presidential election on Nov. 5 will likely have significant impacts on the consumer space, from potential tariffs to possible “price gouging” laws affecting companies including Volvo, Nike, Kroger, Walmart and others. In this episode of the Bloomberg Intelligence Votes and Verdicts podcast, analysts Holly Froum and Poonam Goyal discussed the implications of the election and what it means for the US consumer industry.
This episode was recorded on Oct. 22.
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Episode Transcript
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Speaker 1 (00:15):
Hello and welcome to the Votesenbergs podcast hosted by Bloomberg Intelligence,
part of Bloomberg's investment research department, with five hundred analysts
and strategists bringing across all major world markets. Our coverage
includes over two thousand equities and credits, as well as
outlooks on more than ninety industries and one hundred market industries, currencies,
and commodities. In this podcast series, we talk about the
intersection of business policy and law. The forthcoming Conversation is
(00:39):
part of the Bloomberg Intelligence Election series, covering the industry
and company impacts of the upcoming election. On October twenty second,
Holifrom and Punam Goyle discuss what the election might mean
for the US consumer sector. If you have any questions,
please feel free to reach out to any of us
on the Bloomberg terminal. Good morning, everyone will get started.
Welcome and thank you for joining this webinar. We're my
colleague gol. I will discuss implications of the next election
(01:02):
on consumer companies. My name is Holly from I'm a
litigation analyst. A few quick administrative notes. This presentation will
be recorded and available for playback. Questions will be taken
at the end of the call, and you can ask
questions by submitting them in the Q and A box.
Feel free to reach out to any of us directly
after the webinar if the question is not answered. And
(01:22):
just a quick word about Bloomberg Intelligence. We are the
investment research platform on the Bloomberg terminal, providing in depth
research on industries, companies, and markets and delivering key data
from bi analysts in their given industry. So the outcome
of the US presidential election could have important implications for
consumer companies, including apparel companies, auto manufacturers, and grocery chains.
(01:43):
President Trump and Vice President Harris have somewhat different views
about the applications of tariffs, which could have multi billion
dollar implications. The other area of the campaigns seem to
be focusing on is grocery prices. So I will start
with tariffs, and then I'll talk about potential price gouting
bills in a Harris administration, and then I'll pass it
over to my colleague, senior US retail analyst Punum Gooyle,
who will talk more about potential business implications of terrafs.
(02:08):
So tariffs have become a focal point of the campaign.
We think tariffs are likely under either Harris or Trump,
given precedent and what the candidates have been saying on
the campaign trail, but we think tariffs will be far
more far reaching under a Trump presidency. So what are
the proposals? Trump has said he would impose ten to
twenty percent across the board tariffs on imports into the
US and sixty percent on those from China, and in fact,
(02:30):
recently he has threatened to increase terrists by as much
as one hundred percent on Chinese goods and two hundred
percent on Chinese electric vehicles. The sixty percent tariffs on
goods from China put impact apparel companies like Nike and Adidas, which,
according to the estimates source, eighteen and fourteen percent of
their footwear from China. Automakers like Pulster and Vovo could
(02:52):
also be impacted since some of their evs are made
in China, and companies like Mulu, Lemon and Alberts may
also be affected by the proposal of ten to twenty
percent across the boer tariffs on imports given they largely
make products in Vietnam. So Harris has criticized Trump's plan,
saying it would cost the average household thousands of dollars
a year and increased costs, with some estimating the poor
(03:12):
household costs could be around twenty six hundred a year.
But we said targeted tariffs are likely under Harris too,
and we think that because of the following so. When
Trump was in office, he imposed tariffs on hundreds of
billions of dollars worth of goods from China, including many
on steel and aluminum. The Biden administration kept many of
those tariffs and even increased some, and recently the Biden
(03:32):
administration pleaded pledged terariffs ranging from seven point five to
one hundred percent on solar sales, evs, syringes, steel, and
other goods from China. We doubt Harris is going to
depart from the Biden administration's tariffs, so we see tariffs
continuing under either president. The other thing Biden has said
he intends to do is eliminate a deminimus exemption for
(03:53):
goods that cost under age hundred dollars if anyone is
wondering what that dominimus exemption is. By statute, the Treasury
Secretary can prescribe an exemption from terrorists for goods that
cost less than eight hundred dollars. Packages under the limit
enter terror free if they're addressed to individual residences. According
to Reuters, about one billion goods qualified for this exemption
(04:13):
last year. Excuse me n Reuters reported in September that
the Biden administration is trying to tackle this loophole that's
been created and used by online Chinese companies that ship
direct to consumer. I've been asked whether Biden has the
power to eliminate the diminist exemption, and I think he does,
and then a judicial challenge would fail. And that's because
under the same law that grants the Treasury Secretary the
(04:35):
right to exempt a DIMINISHNUS good from the terrorists, the
Treasury Secretary also was given the power to make an
exception to the exemption when needed to protect revenue or
to protect against unlawful imports. The statute is pretty clear,
and for that reason, we don't think a legal challenge
of pose would succeed. And though the terraffs that Trump
proposes are probably broader than any other president before him,
(04:57):
I think his terrorists would also survive potential judicial challenges.
The reason why I think so is because Congress has
delegated substantial authority to the President to impose harris via
various statutes, and courts that have presided over challenges generally
have sided with the President and read the statutes very broadly. So.
For example, Section three oh one of the Trade Act,
also known as Relief from Unfair Trade Practices Act, allows
(05:19):
the US to impose trade sanctions on foreign countries that
violate US trade agreements or unreasonably burning US commerce. Basically,
the lawgerans the Office of the US Trade Representative power
to investigate and take actions to enforce US rights under
trade agreements. During his administration twenty eighteen, Trump used that
section to justify terraffs on Chinese goods after the Trade
Representative concluded that China was engaging in unfair trade practices
(05:42):
with respect to in US intellectual property. Similarly, Section two
thirty two of the Trade Expansion Act, another law, gives
the President discussion to investigate and then impose trade restrictions
on certain products found to threaten national security. This one
has been used to justify tariffs on steel and aluminum,
for example. Also of the International Emergency Economic Powers Act
(06:02):
gives the president power to restrict international trade on national
securities grounds to advance US economic interests. To use this power,
the president has to declare a national emergency, but the
president has brought authority to do that. So, for example,
in May twenty and eighteen, Trump announced his intention to
use the statue to impose a five percent tariff on
all goods from Mexico to take effect the next month
(06:23):
until quote the illegal migration crisis is alleviated. And finally,
under section three thirty nine of the Teriff Act, the
President can impost terraces of up to fifty percent and
imports from countries discriminating against US commerce. So, as I said,
courts have given presidents a lot of difference when it
comes to trade actions, and challenges for the most part,
have failed. So for example, the Federal Circuit, which is
(06:44):
the appeals court that handles appeals from the International Trade Court,
upheld the Trump administration Section two thirty two terroriffs on
steel imports and then affirm the International Trade Court's determination
that that section did not violate the constitution separation of powers.
The Appellate court explicitly said that courts have a very
limited role in reviewing the president's trade actions that are discretionary.
(07:06):
It will only find conduct umlawful if it involves a
clear misconstruction the statute or significant procedural violation. So the
delegation of power from Congress is very broad, So can
Congress limit that terrort authority. Congress can try to limit
these statutes by enacting another law, but they need a
two thirds majority to overrule a presidential veto which neither
party is likely to get in the next election. So
(07:27):
for that reason, we think terrists are likely in our
both administrations. They are unlikely to be curved by either
the judicial or legislative branch. Turning now to price gouging.
Vice President Kamala Harris has made reducing grocery prices a
focal point of her campaign. She mentioned it in her
Economic Address in August and during the presidential debate in September.
So currently there's no federal price gouging laws. States have them,
(07:50):
which have been successful to varying degrees. But we think
Harris may propose federal legislation that lifts from a senateville
Massachusetts Senator Elizabeth Warren proposed in twenty twenty four, so
what a Senator learned bill due The bill would make
it unlawful to charge a quote grossly excessive price for
products apart from certain exceptions, including the seller's increased costs,
or were the seller's annual gross income is less than
(08:10):
one hundred million dollars. The bill declares a presumptive violation
during a market shock like a global health emergency, where
there's unfair market leverage, or would the seller increase the
price over the average price for which sold the good
one hundred and twenty days preceding the market shock. If
there's a violation, the bill imposes penalties of as much
as five percent of annual revenue if the seller that
committed the violation has quote unfair leverage. An unfair leverage
(08:33):
may be found where the seller earned at least one
billion dollars in gross revenue in the US during the
twelve month period preceding the sale, or aware, for example,
the seller discriminies between equal trading partners, engages in unfair
deceptive practices, or has a dominant position in commerce. If
a similar bill is reintroduced during a Harris presidency in past,
we think grocery retailers could be impacted. Albertson Kroger by
(08:55):
way of example, Currently I have profit margins of one
point four to two point one percent. For example, selling
prices fall short of the rise in their costs by
three percent according to the Bureau of Economic Analysis, so
that legislation could be very impactful if the violation is found.
But we give Senator Warren's bill a thirty percent chance
of passing this year because it hasn't made it out
of Senate committees, and we give the bill the same
(09:16):
chance of passing if Harris wins the presidency because Democrats
are unlikely to secure a filibus recruit majority in the Senate. Also,
if it is passed in its current form, we think
of potential judicial challenge on grounds as void for vagueness
would be successful because the bill allows the Federal Trade
Commission to define quote grossly excessive price using any metric
it deems appropriate. So arguably the statue gives inadequate notice
(09:38):
to potential violators. But unless such a pricing price gouging
bill is passed, the USFDC lacks power to address product
pricing unless deceptive marketing or unfair competition exists, so we
don't think a bill is likely to pass, though the
companies still continue to face this risk. So with that
I'll turn over to my colleague Puno to talk more
on tariffs.
Speaker 2 (09:57):
Thank you Holly. Good morning everyone. So, as we know,
the tariffs are being proposed by either party, but clearly
more severe from the Trump administration. So what does this mean.
It's definitely not good news for retail. Retail sales and
margins will both be pressured regardless of the magnitude of
tariff increases that could come up over the next year. Now,
(10:19):
the interesting thing is that right now tariffs are largely
placed on Chinese imports, and over the last five years
or longer, there has been an intent to diversify exposure
to Chinese manufacturing by retailers and brands where they've actually
started to shift their production into other Asian countries. So
(10:42):
that's good news, which means that the exposure is less
than it was the last time when Trump had administered tariffs.
But the bad news is under the Trump administration, as
Holly mentioned earlier, he is also proposing that other countries
are too similarly tariffed as they were in the last
round ten to twenty percent. So in that case, regardless
(11:04):
if that was to happen, regardless of where you have migrated,
the exposure, the impact is still very similar to what
it was the last round. So while it's nice to
see that, you know manufacturing has diversified. If in fact
all Asian countries or most Asian countries are taxed and
tariff such as India, Indonesia, Bangladesh, Vietnam, you know these
(11:26):
are becoming to be large manufacturing hubs. Today we will
have negative impact. Under our Harrison administration, the impact could
be less because the magnitude of the increase is clearly lower.
But that said, there is still a headwind in place. Now.
The biggest question is who's exposed. And Holly mentioned a
(11:47):
few of the names, but just to put one thing
into perspective, the US largely does not produce its own
apparel and footwear, so the apparel and footwear industries do
have a large exposure to manufacturing outside of the US.
Could we bring manufacturing back to the US, Yes, but
(12:07):
it would take decades. We no longer have the scaled labor,
we no longer have the manufacturing plans, and we just
don't have the infrastructure to support manufacturing of apparel and
footwear at the scale that it has moved abroad. So
how much do we consume from China clearly a lot.
(12:28):
We consume twenty four percent of apparel and thirty four
percent of footwear from China alone. Now that has moderated
from thirty one percent of footwear before and fifteen percent.
So I would say that, you know, when I think
about the space, I think there is clearly a headwind
(12:49):
and a bigger headwind in place from the Trump administration
going into effect versus the Harris But nonetheless, retailers will
be forced to take up prices. They will see a
margin hit to the bottom line because there's it's unlikely
that they could do a one to one increase passing
along the entire cost to the consumer. So when we
(13:09):
think about this and we think about who's exposed, I'm
going to go sector vice sector. At BI, we have
various senior analysts that cover the consumer space, and many
of us have written to the impact it has on
each of the companies that we cover. You can find
all this research on BI. But just to start with
the apparel and footwear space. You know, when we think
(13:30):
about the largest footwear manufacturer retailer, Nike comes to mind,
and the company itself gets twenty nine percent of its
footwear and twenty six percent of its apparel came from
China in twenty sixteen. Now they have moderated that exposure.
It now gets eighteen percent of its footworth, so more
than a ten percentage point decrease from before, and sixteen
(13:53):
percent from apparel, and that's also about a ten percentage
point decrease making strides, but nonetheless they're going to be exposed.
When you think about Adidas, the second largest footwear manufacturer,
Adida sources from China alone in twenty twenty three fifteen
(14:13):
percent of its apparel and fourteen percent of its footwear.
That's also down. It was twenty nine percent for apparel
in twenty fifteen and twenty three percent of footwear in
twenty fifteen, So you know Adidas. The one nice thing
that we see in Adidas is that they are now
using and many of the footwear companies, they are using
(14:34):
what's produced in China for China. So companies have the ability,
if additional tariffs were to be imposed, to take what's
manufactured in China and distribute it to regions outside of
the US. That way, they don't have to have terraffs
and utilize the other regions to fulfill a lot of
the demand for the US. A company that has not
(14:55):
reduced tariffs in the footwear space, but rather sorry not
tariff's exposure has increased it is Puma. So Puma's exposure
to China has gone from twenty six percent to thirty percent,
and that's intentional because they want to fill local demand.
They are making a much bigger push in the Asian countries,
notably China, and they want to use inventory meat in
(15:16):
the region for the region. Now, companies in the at
leisure space that don't have as big of an exposure
are companies like lul Lemon, All Birds, and VF Corp.
They don't have exposure to China, are very little exposure,
and it's interesting to see the companies that don't because
you know, as you're looking at who gets elected, you
(15:37):
can kind of segregate the ones with more exposure versus
the ones with little to no exposure. And they don't
have exposure to China, but they do have exposure to
the other Asian countries. So we still have to remember
that there is a possibility that they too would still
be impacted should tariffs extend beyond China. Additional teriffs. Now,
when you move over to the apparel space. The companies
(16:00):
that are largely exposed to China manufacturing are companies like
Oxford Industries, as my colleague highlights, forty one percent of
its merchandise is from China in twenty twenty three. Aritzia,
another company, source thirty to thirty five percent. So both
of these retailers are clearly more exposed should tariffs be
(16:21):
increased next year. And now when we look at, you know,
within apparel brands, who's less exposed. The companies that were
highlighted include Gap, Levi's, Victoria's Secret, and Abercrombie. They too
have been shifting away from China since twenty eighteen, and Gap,
for example, we estimate ATBI imported about ten percent or
(16:43):
less from China, and that was also ten percentage points
below what it did in twenty eighteen of about twenty
one percent. Levi's, interestingly, just imports under one percent, and
that's down from eight percent five years ago. So you're
starting to see the theme that companies have diversified, they
(17:04):
are moving away from China. But I still want to
remind everyone that if tariffs are imposed on other countries
outside of China, the impact this round could be more
pronounced than it was the last round, because not only
do you have increasing tariffs from China, but you also
have tariffs being added to other Asian countries. So the
(17:25):
combined impact is actually going to be bigger than it
was the last round should both of those scenarios play
out under the Trump administration. Ralph Lauren also said that
they've brought down their exposure to a high single digit
percentage point coming into the US from China, and that's
stands substantially from thirty three percent in twenty eighteen. Now
(17:46):
when we move over into the hardline space or analyst
highlights that ELF Beauty is probably the most exposed when
I think across retail to China because eighty percent comes
China alone. They beat Hasbro and Mattel, which is now
fifty percent down from sixty to seventy percent prior. On
(18:08):
the home hardline section, William Sinoma and our Ah are
also exposed at twenty to twenty five percent, down also
about from thirty five to fifty percent prior. So you know,
when you think about the space collectively, I would say
the headwind is there under any situation, clearly greater under
Trump presidency and even greater should tariffs be imposed to
(18:32):
countries outside of China, because you know, we have this
notion that many companies have diverse fight out of China,
so the exposure is less and therefore the impact should
be less. But if Vietnam is going to be tariff,
even if it's at ten percent, it's going to magnify.
It's going to magnify the impact that retailers are going
(18:55):
to face and margins will be hit greater. Our parel
analyst estimates the basis to fifty basis point impact from
additional terroriffs, but I think you know the impact could
be much much higher should both situations play out where
other countries are also text with that, I'll pass it
back to Holly and thank you.
Speaker 1 (19:16):
I don't see any open questions, so again, if if
any if any of you have questions after the call,
you can I be either of us and we'll be
happy to chat
Hello and welcome to the Votesenbergs podcast hosted by Bloomberg Intelligence,
part of Bloomberg's investment research department, with five hundred analysts
and strategists bringing across all major world markets. Our coverage
includes over two thousand equities and credits, as well as
outlooks on more than ninety industries and one hundred market industries, currencies,
and commodities. In this podcast series, we talk about the
intersection of business policy and law. The forthcoming Conversation is
(00:39):
part of the Bloomberg Intelligence Election series, covering the industry
and company impacts of the upcoming election. On October twenty second,
Holifrom and Punam Goyle discuss what the election might mean
for the US consumer sector. If you have any questions,
please feel free to reach out to any of us
on the Bloomberg terminal. Good morning, everyone will get started.
Welcome and thank you for joining this webinar. We're my
colleague gol. I will discuss implications of the next election
(01:02):
on consumer companies. My name is Holly from I'm a
litigation analyst. A few quick administrative notes. This presentation will
be recorded and available for playback. Questions will be taken
at the end of the call, and you can ask
questions by submitting them in the Q and A box.
Feel free to reach out to any of us directly
after the webinar if the question is not answered. And
(01:22):
just a quick word about Bloomberg Intelligence. We are the
investment research platform on the Bloomberg terminal, providing in depth
research on industries, companies, and markets and delivering key data
from bi analysts in their given industry. So the outcome
of the US presidential election could have important implications for
consumer companies, including apparel companies, auto manufacturers, and grocery chains.
(01:43):
President Trump and Vice President Harris have somewhat different views
about the applications of tariffs, which could have multi billion
dollar implications. The other area of the campaigns seem to
be focusing on is grocery prices. So I will start
with tariffs, and then I'll talk about potential price gouting
bills in a Harris administration, and then I'll pass it
over to my colleague, senior US retail analyst Punum Gooyle,
who will talk more about potential business implications of terrafs.
(02:08):
So tariffs have become a focal point of the campaign.
We think tariffs are likely under either Harris or Trump,
given precedent and what the candidates have been saying on
the campaign trail, but we think tariffs will be far
more far reaching under a Trump presidency. So what are
the proposals? Trump has said he would impose ten to
twenty percent across the board tariffs on imports into the
US and sixty percent on those from China, and in fact,
(02:30):
recently he has threatened to increase terrists by as much
as one hundred percent on Chinese goods and two hundred
percent on Chinese electric vehicles. The sixty percent tariffs on
goods from China put impact apparel companies like Nike and Adidas, which,
according to the estimates source, eighteen and fourteen percent of
their footwear from China. Automakers like Pulster and Vovo could
(02:52):
also be impacted since some of their evs are made
in China, and companies like Mulu, Lemon and Alberts may
also be affected by the proposal of ten to twenty
percent across the boer tariffs on imports given they largely
make products in Vietnam. So Harris has criticized Trump's plan,
saying it would cost the average household thousands of dollars
a year and increased costs, with some estimating the poor
(03:12):
household costs could be around twenty six hundred a year.
But we said targeted tariffs are likely under Harris too,
and we think that because of the following so. When
Trump was in office, he imposed tariffs on hundreds of
billions of dollars worth of goods from China, including many
on steel and aluminum. The Biden administration kept many of
those tariffs and even increased some, and recently the Biden
(03:32):
administration pleaded pledged terariffs ranging from seven point five to
one hundred percent on solar sales, evs, syringes, steel, and
other goods from China. We doubt Harris is going to
depart from the Biden administration's tariffs, so we see tariffs
continuing under either president. The other thing Biden has said
he intends to do is eliminate a deminimus exemption for
(03:53):
goods that cost under age hundred dollars if anyone is
wondering what that dominimus exemption is. By statute, the Treasury
Secretary can prescribe an exemption from terrorists for goods that
cost less than eight hundred dollars. Packages under the limit
enter terror free if they're addressed to individual residences. According
to Reuters, about one billion goods qualified for this exemption
(04:13):
last year. Excuse me n Reuters reported in September that
the Biden administration is trying to tackle this loophole that's
been created and used by online Chinese companies that ship
direct to consumer. I've been asked whether Biden has the
power to eliminate the diminist exemption, and I think he does,
and then a judicial challenge would fail. And that's because
under the same law that grants the Treasury Secretary the
(04:35):
right to exempt a DIMINISHNUS good from the terrorists, the
Treasury Secretary also was given the power to make an
exception to the exemption when needed to protect revenue or
to protect against unlawful imports. The statute is pretty clear,
and for that reason, we don't think a legal challenge
of pose would succeed. And though the terraffs that Trump
proposes are probably broader than any other president before him,
(04:57):
I think his terrorists would also survive potential judicial challenges.
The reason why I think so is because Congress has
delegated substantial authority to the President to impose harris via
various statutes, and courts that have presided over challenges generally
have sided with the President and read the statutes very broadly. So.
For example, Section three oh one of the Trade Act,
also known as Relief from Unfair Trade Practices Act, allows
(05:19):
the US to impose trade sanctions on foreign countries that
violate US trade agreements or unreasonably burning US commerce. Basically,
the lawgerans the Office of the US Trade Representative power
to investigate and take actions to enforce US rights under
trade agreements. During his administration twenty eighteen, Trump used that
section to justify terraffs on Chinese goods after the Trade
Representative concluded that China was engaging in unfair trade practices
(05:42):
with respect to in US intellectual property. Similarly, Section two
thirty two of the Trade Expansion Act, another law, gives
the President discussion to investigate and then impose trade restrictions
on certain products found to threaten national security. This one
has been used to justify tariffs on steel and aluminum,
for example. Also of the International Emergency Economic Powers Act
(06:02):
gives the president power to restrict international trade on national
securities grounds to advance US economic interests. To use this power,
the president has to declare a national emergency, but the
president has brought authority to do that. So, for example,
in May twenty and eighteen, Trump announced his intention to
use the statue to impose a five percent tariff on
all goods from Mexico to take effect the next month
(06:23):
until quote the illegal migration crisis is alleviated. And finally,
under section three thirty nine of the Teriff Act, the
President can impost terraces of up to fifty percent and
imports from countries discriminating against US commerce. So, as I said,
courts have given presidents a lot of difference when it
comes to trade actions, and challenges for the most part,
have failed. So for example, the Federal Circuit, which is
(06:44):
the appeals court that handles appeals from the International Trade Court,
upheld the Trump administration Section two thirty two terroriffs on
steel imports and then affirm the International Trade Court's determination
that that section did not violate the constitution separation of powers.
The Appellate court explicitly said that courts have a very
limited role in reviewing the president's trade actions that are discretionary.
(07:06):
It will only find conduct umlawful if it involves a
clear misconstruction the statute or significant procedural violation. So the
delegation of power from Congress is very broad, So can
Congress limit that terrort authority. Congress can try to limit
these statutes by enacting another law, but they need a
two thirds majority to overrule a presidential veto which neither
party is likely to get in the next election. So
(07:27):
for that reason, we think terrists are likely in our
both administrations. They are unlikely to be curved by either
the judicial or legislative branch. Turning now to price gouging.
Vice President Kamala Harris has made reducing grocery prices a
focal point of her campaign. She mentioned it in her
Economic Address in August and during the presidential debate in September.
So currently there's no federal price gouging laws. States have them,
(07:50):
which have been successful to varying degrees. But we think
Harris may propose federal legislation that lifts from a senateville
Massachusetts Senator Elizabeth Warren proposed in twenty twenty four, so
what a Senator learned bill due The bill would make
it unlawful to charge a quote grossly excessive price for
products apart from certain exceptions, including the seller's increased costs,
or were the seller's annual gross income is less than
(08:10):
one hundred million dollars. The bill declares a presumptive violation
during a market shock like a global health emergency, where
there's unfair market leverage, or would the seller increase the
price over the average price for which sold the good
one hundred and twenty days preceding the market shock. If
there's a violation, the bill imposes penalties of as much
as five percent of annual revenue if the seller that
committed the violation has quote unfair leverage. An unfair leverage
(08:33):
may be found where the seller earned at least one
billion dollars in gross revenue in the US during the
twelve month period preceding the sale, or aware, for example,
the seller discriminies between equal trading partners, engages in unfair
deceptive practices, or has a dominant position in commerce. If
a similar bill is reintroduced during a Harris presidency in past,
we think grocery retailers could be impacted. Albertson Kroger by
(08:55):
way of example, Currently I have profit margins of one
point four to two point one percent. For example, selling
prices fall short of the rise in their costs by
three percent according to the Bureau of Economic Analysis, so
that legislation could be very impactful if the violation is found.
But we give Senator Warren's bill a thirty percent chance
of passing this year because it hasn't made it out
of Senate committees, and we give the bill the same
(09:16):
chance of passing if Harris wins the presidency because Democrats
are unlikely to secure a filibus recruit majority in the Senate. Also,
if it is passed in its current form, we think
of potential judicial challenge on grounds as void for vagueness
would be successful because the bill allows the Federal Trade
Commission to define quote grossly excessive price using any metric
it deems appropriate. So arguably the statue gives inadequate notice
(09:38):
to potential violators. But unless such a pricing price gouging
bill is passed, the USFDC lacks power to address product
pricing unless deceptive marketing or unfair competition exists, so we
don't think a bill is likely to pass, though the
companies still continue to face this risk. So with that
I'll turn over to my colleague Puno to talk more
on tariffs.
Speaker 2 (09:57):
Thank you Holly. Good morning everyone. So, as we know,
the tariffs are being proposed by either party, but clearly
more severe from the Trump administration. So what does this mean.
It's definitely not good news for retail. Retail sales and
margins will both be pressured regardless of the magnitude of
tariff increases that could come up over the next year. Now,
(10:19):
the interesting thing is that right now tariffs are largely
placed on Chinese imports, and over the last five years
or longer, there has been an intent to diversify exposure
to Chinese manufacturing by retailers and brands where they've actually
started to shift their production into other Asian countries. So
(10:42):
that's good news, which means that the exposure is less
than it was the last time when Trump had administered tariffs.
But the bad news is under the Trump administration, as
Holly mentioned earlier, he is also proposing that other countries
are too similarly tariffed as they were in the last
round ten to twenty percent. So in that case, regardless
(11:04):
if that was to happen, regardless of where you have migrated,
the exposure, the impact is still very similar to what
it was the last round. So while it's nice to
see that, you know manufacturing has diversified. If in fact
all Asian countries or most Asian countries are taxed and
tariff such as India, Indonesia, Bangladesh, Vietnam, you know these
(11:26):
are becoming to be large manufacturing hubs. Today we will
have negative impact. Under our Harrison administration, the impact could
be less because the magnitude of the increase is clearly lower.
But that said, there is still a headwind in place. Now.
The biggest question is who's exposed. And Holly mentioned a
(11:47):
few of the names, but just to put one thing
into perspective, the US largely does not produce its own
apparel and footwear, so the apparel and footwear industries do
have a large exposure to manufacturing outside of the US.
Could we bring manufacturing back to the US, Yes, but
(12:07):
it would take decades. We no longer have the scaled labor,
we no longer have the manufacturing plans, and we just
don't have the infrastructure to support manufacturing of apparel and
footwear at the scale that it has moved abroad. So
how much do we consume from China clearly a lot.
(12:28):
We consume twenty four percent of apparel and thirty four
percent of footwear from China alone. Now that has moderated
from thirty one percent of footwear before and fifteen percent.
So I would say that, you know, when I think
about the space, I think there is clearly a headwind
(12:49):
and a bigger headwind in place from the Trump administration
going into effect versus the Harris But nonetheless, retailers will
be forced to take up prices. They will see a
margin hit to the bottom line because there's it's unlikely
that they could do a one to one increase passing
along the entire cost to the consumer. So when we
(13:09):
think about this and we think about who's exposed, I'm
going to go sector vice sector. At BI, we have
various senior analysts that cover the consumer space, and many
of us have written to the impact it has on
each of the companies that we cover. You can find
all this research on BI. But just to start with
the apparel and footwear space. You know, when we think
(13:30):
about the largest footwear manufacturer retailer, Nike comes to mind,
and the company itself gets twenty nine percent of its
footwear and twenty six percent of its apparel came from
China in twenty sixteen. Now they have moderated that exposure.
It now gets eighteen percent of its footworth, so more
than a ten percentage point decrease from before, and sixteen
(13:53):
percent from apparel, and that's also about a ten percentage
point decrease making strides, but nonetheless they're going to be exposed.
When you think about Adidas, the second largest footwear manufacturer,
Adida sources from China alone in twenty twenty three fifteen
(14:13):
percent of its apparel and fourteen percent of its footwear.
That's also down. It was twenty nine percent for apparel
in twenty fifteen and twenty three percent of footwear in
twenty fifteen, So you know Adidas. The one nice thing
that we see in Adidas is that they are now
using and many of the footwear companies, they are using
(14:34):
what's produced in China for China. So companies have the ability,
if additional tariffs were to be imposed, to take what's
manufactured in China and distribute it to regions outside of
the US. That way, they don't have to have terraffs
and utilize the other regions to fulfill a lot of
the demand for the US. A company that has not
(14:55):
reduced tariffs in the footwear space, but rather sorry not
tariff's exposure has increased it is Puma. So Puma's exposure
to China has gone from twenty six percent to thirty percent,
and that's intentional because they want to fill local demand.
They are making a much bigger push in the Asian countries,
notably China, and they want to use inventory meat in
(15:16):
the region for the region. Now, companies in the at
leisure space that don't have as big of an exposure
are companies like lul Lemon, All Birds, and VF Corp.
They don't have exposure to China, are very little exposure,
and it's interesting to see the companies that don't because
you know, as you're looking at who gets elected, you
(15:37):
can kind of segregate the ones with more exposure versus
the ones with little to no exposure. And they don't
have exposure to China, but they do have exposure to
the other Asian countries. So we still have to remember
that there is a possibility that they too would still
be impacted should tariffs extend beyond China. Additional teriffs. Now,
when you move over to the apparel space. The companies
(16:00):
that are largely exposed to China manufacturing are companies like
Oxford Industries, as my colleague highlights, forty one percent of
its merchandise is from China in twenty twenty three. Aritzia,
another company, source thirty to thirty five percent. So both
of these retailers are clearly more exposed should tariffs be
(16:21):
increased next year. And now when we look at, you know,
within apparel brands, who's less exposed. The companies that were
highlighted include Gap, Levi's, Victoria's Secret, and Abercrombie. They too
have been shifting away from China since twenty eighteen, and Gap,
for example, we estimate ATBI imported about ten percent or
(16:43):
less from China, and that was also ten percentage points
below what it did in twenty eighteen of about twenty
one percent. Levi's, interestingly, just imports under one percent, and
that's down from eight percent five years ago. So you're
starting to see the theme that companies have diversified, they
(17:04):
are moving away from China. But I still want to
remind everyone that if tariffs are imposed on other countries
outside of China, the impact this round could be more
pronounced than it was the last round, because not only
do you have increasing tariffs from China, but you also
have tariffs being added to other Asian countries. So the
(17:25):
combined impact is actually going to be bigger than it
was the last round should both of those scenarios play
out under the Trump administration. Ralph Lauren also said that
they've brought down their exposure to a high single digit
percentage point coming into the US from China, and that's
stands substantially from thirty three percent in twenty eighteen. Now
(17:46):
when we move over into the hardline space or analyst
highlights that ELF Beauty is probably the most exposed when
I think across retail to China because eighty percent comes
China alone. They beat Hasbro and Mattel, which is now
fifty percent down from sixty to seventy percent prior. On
(18:08):
the home hardline section, William Sinoma and our Ah are
also exposed at twenty to twenty five percent, down also
about from thirty five to fifty percent prior. So you know,
when you think about the space collectively, I would say
the headwind is there under any situation, clearly greater under
Trump presidency and even greater should tariffs be imposed to
(18:32):
countries outside of China, because you know, we have this
notion that many companies have diverse fight out of China,
so the exposure is less and therefore the impact should
be less. But if Vietnam is going to be tariff,
even if it's at ten percent, it's going to magnify.
It's going to magnify the impact that retailers are going
(18:55):
to face and margins will be hit greater. Our parel
analyst estimates the basis to fifty basis point impact from
additional terroriffs, but I think you know the impact could
be much much higher should both situations play out where
other countries are also text with that, I'll pass it
back to Holly and thank you.
Speaker 1 (19:16):
I don't see any open questions, so again, if if
any if any of you have questions after the call,
you can I be either of us and we'll be
happy to chat
Host
Elliott Stein
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