Moody's Investors Service said July 26 the proposed U.S. tariffs on $500 billion of imported Chinese goods would be a credit negative factor for the U.S. apparel and footwear sector.
According to the rating agency, China is a dominant supplier of apparel and footwear to the U.S. The proposed tariffs would increase the costs of imported goods sold in the U.S. and hit more than half the revenues of large U.S.-based apparel companies.
About 58% of combined sales generated in the U.S. are at risk of increased tariffs, Moody's said in a release. Companies would likely go through gross margin pressures for one to two years if the tariffs are imposed as it will take time for them to move operations out of China or adjust costs.
Companies such as G-III Apparel Group, footwear companies Caleres Inc., Wolverine World Wide Inc. and Payless Inc. that sell a greater percentage of imported Chinese goods in the U.S. would face the biggest dent in profit. Smaller apparel companies with high leverage or low profits could be exposed if their earnings decline relative to debt service costs, or if they experience any disruptions in their supply chains.
The rating agency said passing along the entire increase on the products could be a challenge, considering the highly competitive and promotional apparel retail environment in the U.S. Only the larger companies with stronger margins and balance sheets, such as Wolverine and PVH Corp. can absorb higher costs.
Moody's further added that a retaliatory move by China or other countries on the U.S. export could force the U.S.-based companies to shift production away from the U.S.