The impact of US president Donald Trump's recent tariff announcement on the softlines retail industry will be more severe than anticipated with significant consequences for stock prices in the near term, analysts at UBS believe.
The analysts wrote that the new tariffs will have a very negative effect on the sector, with one of the key surprises being the broad scope of the tariff increases.
"One of the biggest surprises is how almost every company in softlines will be impacted by the news announcement,” they wrote.
The analysts estimate that the tariffs could result in several hundred basis points of gross margin being wiped out, assuming all other factors remain equal.
In response, the industry is expected to raise prices, though this comes with a downside. "The financial impact will be felt on revenue as consumers buy disproportionately fewer units in response to higher prices," UBS wrote.
However, the analysts are optimistic about the outlook for softlines retail following the near-term correction.
A silver lining from the tariff announcement is reduced uncertainty in the marketplace.
“Plus, stocks likely incorporate the news into prices quickly and we think it is possible some countries negotiate with the US to lower the tariff burden,” they wrote.
“Therefore, it's possible things ‘don’t get worse’ from here, making it a good moment to buy stocks since prices tend to respond positively when things inflect from ‘getting worse’ to ‘getting less bad.’”
That said, the analysts cautioned that geopolitical tensions could escalate. "A key factor holding us back from calling 'the bottom' on Softline stocks is the possibility of unexpected consequences stemming from the tariff news," they explained.
“One major concern is whether the new tariffs might provoke a backlash against American brands in international markets. There is also the risk that other countries might retaliate with their own tariffs.”
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Despite the current risks, the analysts recommended buying shares of off-price retailers TJX Companies Inc (NYSE:TJX) and Burlington Stores Inc. (NYSE:BURL).
They argue that these companies have two key advantages. First, with apparel and footwear prices expected to rise, their value propositions will become even more attractive to consumers, potentially leading to market share gains.
Second, the anticipated supply chain dislocation caused by the tariffs could benefit these off-price retailers, as they "typically outperform in times of dislocation."