We made a call just over a month ago detailing our thesis of Retail5.0 -- the start of the fifth mega-cycle in retail’s history – called Navigating the Apparel Depression (For a Link to the Black Book: CLICK HERE).
Our stance is that tariffs are going to be a catalyst to thrust US apparel retail into a depression that will mean a significant amount of square footage coming out of the industry at an accelerating pace. Let’s be absolutely clear though -- tariffs are not the cause, but rather the catalyst. The cause is a 25 year deflationary period that cut the average retail cost of a unit of apparel by 65%, which drove per capita consumption to a mind-numbing 86 units in the US, which coincided with a square feet per capita to an unsustainable 44 ft/cap. At the same time we’ve got ecommerce putting secular pressure on B&M sales productivity, which is causing a sharp acceleration in the impact on retail’s profit equation and the bankruptcy cycle.
As it relates to our call, we got some helpful numbers today from CRI on the impact of tariffs.
Here are the details:
- CRI’s China exposure is relatively small, going from 26% of units at beginning of 2019, to be down to 15% heading into 2020.
- The company noted a 25% tariff on children’s apparel would mean $100mm unmitigated risk to CRI’s P&L.
- The apparel tariff is currently only at 15%, but the company also has hardgoods exposure from Skip Hop.
- Today CRI stated that after renegotiations with its Chinese manufacturing, the estimated impact for 2020 is $30mm, or ~8% of EBIT. The company hopes to moderate that impact with some price adjustments and lower product costs.
- If we assume the company has a high teens rate of China sourcing currently, that $30mm would imply it is recognizing a ~9% tariff after mitigation on a blended mix between products tariffed at 15% and 25%. So it seems CRI is taking roughly half of the tariff burden so far, sharing with its sourcing partners, which is right in line with our view for the US retailers.
- Lastly, the company noted that if the currently delayed 5% list 3 increase does not happen, and if list 4B does not happen, that would save them ~$4mm of that $30mm guide.
- What is missing unfortunately is how much of the cost impact is fully baked, regardless of whether or not tariffs are eliminated. We could not glean a clear read there from the company’s commentary today.
We’d put CRI as above average in its negotiating power within the supply chain given the high unit volumes it sells. We expect to hear similar commentary from other brands/retailers throughout earnings season, though likely with others having higher risk to earnings.
