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This U.S. Apparel Retailer Isn't Scared of Tariffs

By Steve Symington – Jun 18, 2019 at 6:39AM

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Breaking with its fearful peers, one American business thinks apparel tariffs won't be a problem.

As trade tensions have escalated between China and the United States over the past several weeks, shares of virtually every business in the crossfire unsurprisingly plunged. It was hard to blame investors, after all, for fretting over the prospect of a combination of increased tariffs from the U.S. on imported Chinese goods (to 25% from a current rate of 10%), and retaliatory tariffs imposed by China in response.

Apparel retail stocks got hit particularly hard, given the impact the trade war could have not only on American companies looking to expand their presence in the Middle Kingdom, but also to those apparel retailers who rely on Chinese manufacturers to keep costs down.

In fact, on Monday Rick Helfenbein, CEO of the American Apparel & Footwear Association -- a group that represents more than 300 domestic companies -- told CNBC the China tariffs are a "disaster in the making," adding that the industry is "deeply entrenched [...] with nowhere to go" if it's hit with such a steep increase in costs.

President Trump did offer a potential olive branch on Tuesday, indicating he'll meet with Chinese President Xi Jinping at the upcoming G-20 summit. But any amicable deal stemming from that meeting is far from guaranteed.

Two cargo containers crashing together, one with U.S. flag, one with China flag.

Image source: Getty Images.

"Everybody is waiting with bated breath," but...

But not every apparel company is feeling the tariff pressure.

Consider American Eagle Outfitters (AEO 2.05%), shares of which have been dragged down nearly 30% since the beginning of May, along with its industry peers, largely on tariff grounds. American Eagle's drop was modestly extended last week as well, despite the company posting better-than-expected fiscal first-quarter results, including its 17th straight quarter of positive comparable sales (up 6%).

During the subsequent conference call on June 5, American Eagle CFO Robert Madore stated the company's view of the trade war:

Regarding tariffs, those announced to date are immaterial. However, if tariffs are expanded to apparel, there would be an adverse effect on our financial results. With that said, we are actively collaborating with our sourcing partners and believe we can significantly mitigate any potential impact from additional tariffs. We are also working to further diversify our production capabilities across geographies.

When asked to elaborate during the Q&A portion of the call, Madore added:

[W]e've got very strong relationships with our manufacturers. We are the customer of choice just based on the amount of business that we do with them and the relationships that we have. We've been working through the China tariff possibility for quite a while with them and we feel very confident that we will be able to significantly or substantially mitigate any potential impact of China tariff, should they go through -- in addition to the fact that we're constantly looking to diversify the geographies that we do produce our inventory and we will continue that exercise. So everybody is waiting with bated breath to see what happens with this China trade war. But I think we are in a great position to mitigate it significantly should it occur.

Put simply, American Eagle is astutely pushing (and has been for some time) to negate the impact of tariffs before it becomes a bigger problem. In the meantime, its brand, in-store experience, and apparel offerings -- led by the relative strength of its popular jeans business driving traffic -- are resonating well with retail industry consumers.

So at least in American Eagle's case, whether the China trade war continues to escalate seems mostly irrelevant even as the rest of the apparel retail industry struggles. And for investors willing to take advantage of its pullback today, I think that could be a recipe for outstanding gains going forward.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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