By Esther Fung and Inti Pacheco 

U.S. apparel companies are bracing for squeezed profits and potential store closures as a result of the Trump administration's pledge to extend tariffs on Chinese imports.

President Trump last week walked back some of his tariff threat, agreeing to delay new duties on toys, cellphones and other electronics until December. But a majority of apparel and much of the footwear imported from China are still subject to tariffs starting Sept. 1.

About 40% of all clothing and 70% of shoes sold in the U.S. are made in China, according to the American Apparel and Footwear Association. After China became a member of the World Trade Organization in 2001, U.S. retailers increasingly relied on manufacturing their goods there because of cheaper labor and production costs.

In all, about $33 billion in apparel, shoes and hats are among the items subject to a 10% tariff on Chinese imports beginning Sept. 1, according to a Wall Street Journal analysis of data from the Office of the U.S. Trade Representative and the Census Bureau.

As fall approaches, the apparel that will be hit by the tariffs includes gloves, mittens, overcoats and sweaters. More than 60% of U.S. stockings and socks are made in China, and $250 million of them face tariffs in less than two weeks.

Many apparel companies have already been cutting prices to fend off heightened competition from discount chains, Amazon.com Inc. and other online retailers. That has left them operating on such thin margins that absorbing even a portion of any costs associated with the new tariffs would be painful.

The tariffs would come not long before the start of the holiday shopping season, which retailers count on for most of their annual sales.

"Tariffs could wipe out their profits," said Wade Miquelon, chief executive officer of Joann Fabric and Craft Stores, in a recent press call.

Jay Sole, a retail and department store analyst at UBS, estimated that if the administration raised tariffs on China to 25%, it could lead to as many as 12,000 stores closing, about 10% of the stores among the 524 retailers UBS tracks. Even the proposed 10% tariff would pressure hundreds of stores throughout the U.S., he added.

Some retail landlords are less pessimistic. They suggest it could take years before tariffs siphon enough cash flow to threaten rent payments of most retailers.

"It's a little far down the line," said Charles Lanier, director of real estate at Plaza Associates Inc., a private commercial-property landlord that runs Crabtree Valley Mall in Raleigh, N.C.

The administration has already imposed 25% tariffs on $250 billion worth of Chinese goods. With plans for new duties on additional Chinese products, virtually all imports from China would be subject to tariffs by year's end.

Most apparel companies are expected to absorb the cost increase themselves or negotiate ways to cut expenses with their Chinese manufacturers to avoid antagonizing customers with higher prices.

Macy's Inc., which raised prices on some luggage, housewares and furniture when tariffs on such items rose to 25% in May, said it was unlikely to repeat that approach for apparel subject to new tariffs.

"We learned from that experience that the customer had very little appetite for those cost increases," CEO Jeffrey Gennette said during the company's earnings call last week. Instead, he said, Macy's would work with its Chinese partners to absorb the extra costs.

Many apparel companies would find it painful to do the same. Fifteen publicly traded clothing, footwear and accessories retailers tracked by UBS have margins of less than 3%. These companies represent $42 billion in sales, and they operate more than 12,000 stores, UBS said.

Still, not all apparel companies would suffer equally. Some brands have already taken steps to mitigate the potential impact of new China tariffs, or even to benefit from them.

Weyco Group Inc., which sells Florsheim and Stacy Adams shoes, said it increased imports from China in the spring to stay ahead of tariffs that would affect apparel and footwear.

"In May, when the threat again became evident, we had discussions with all the factories in China and just tried to pull everything for that we could," Weyco CEO Thomas W. Florsheim Jr. said during an earnings call this month.

Columbia Sportswear Co. said it may stop offering some products made in China. "When there's uncertainty, that's the enemy of investment," said Peter Bragdon, Columbia Sportswear's executive vice president.

At least a few retailers already facing tariffs have been able to raise prices without much consumer backlash. In May, Home Depot said it managed to pass the tariff costs on imported washing machines to its customers. Sales initially sagged, then recovered.

Steven Madden Ltd., a shoe and fashion-accessory company, said it has already moved some production out of China. If any competitors feel compelled to raise prices after the China tariffs, the company would view that as an opportunity to gain market share.

"We're making a good chunk of the Steve Madden-branded products in Mexico for fall," CEO Edward Rosenfeld said on a recent earnings call. He added that some production was moved to Cambodia "and a number of other countries."

But shifting suppliers isn't an easy option for most apparel companies. It takes years to build relationships and establish new supply chains. Retailers have built quality-control systems in Chinese factories that can't be dismantled and reassembled in another country overnight.

China's currency depreciation earlier this month, when officials reduced the value of the yuan against the dollar by around 2.5%, helps a bit by making Chinese products cheaper in dollar terms. Yet many expenses tied to importing products including gasoline and materials such as cotton, are dollar-based.

Joann Fabric and Craft Stores, which has 850 stores across 49 states, faces tariffs on artificial-floral supplies and plans to hold prices steady this year and absorb any losses for now, rather than risk alienating customers with higher prices or closing down stores.

"We don't want to cut hours or give up good properties," said Mr. Miquelon.

Write to Esther Fung at esther.fung@wsj.com and Inti Pacheco at inti.pacheco@wsj.com

(END) Dow Jones Newswires

August 20, 2019 05:44 ET (09:44 GMT)

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