In advance of earnings calls, apparel brands face ‘the Trump question’
What to say? As corporate chieftains prepare for a round of no doubt excruciatingly painful fourth-quarter conference calls with Wall Street, they find themselves on unusually uncertain ground.
President Trump is just starting to follow through on his promises to change almost everything, from the corporate tax rate to rules that govern international trade and help set the cost of making goods.
Fashion was already in the midst of overlapping and seismic changes that are only speeding up with poor holiday sales and more store closures.
But the Trump phenomenon is a topic for fresh conversation; a rolling wave of policy and stylistic changes at the very top of the federal government that is unpredictable, fast-moving and dramatic — for better or worse. There is a sense that whatever the business landscape is one day, it could change markedly with an overnight tweet from the White House.
The most pressing concern, for now, appears to be a potential border tax of 20 percent or more on imports, which could make nearly all goods more expensive at a stroke. The modern fashion industry is based on making apparel in markets with cheap labor and selling it in the U.S. and Europe.
Luckily, Wall Street analysts aren’t going to expect fashion chief executive officers to know the unknowable, but they will have to be able to say how they’ll react to the new chaos. Getting ready to get the question are leaders at Under Armour Inc., Coach Inc., Ralph Lauren Corp., the Estée Lauder Cos. Inc. and Hanesbrands Inc., all of which report quarterly earnings this week.
“There’s a very dark cloud over the group right now, which stems from poor fundamentals, but secondly because of the tail risk that’s associated with what Trump will do in terms of tariffs,” said Ike Boruchow, an analyst at Wells Fargo.
“We’ll start to get a few nuggets out of these companies that help us think about what the tail-risk is for Trump trade change,” Boruchow said. “Every company has their tax people, every company is looking into it, but right now, their answer is probably similar to yours and mine — they don’t really know.”
He expects executives to point back to 2010 and 2011, when cotton prices rose to more than $2 a pound amid supply shortages, forcing many brands to scramble, adjust prices, rework supply chains and switch to other fabrics.
Ceo’s — used to playing up their own strengths and contrasting them with others’ weaknesses — are also likely to point out how they’re better able to weather changes than their competitors.
Boruchow said executives would tell analysts “why it’s not as bad for them and historically, in situations like this, what they were able to do and why they can do it again. No one’s going to say, ‘Hey, guys, we’re toast and we’re just counting the days.’”
Ultimately, he predicted new trade rules would take into account different types of businesses.
“You’re not going to treat one company that has production of automobiles overseas the same as Tiffany, who is digging up diamonds in a mine in Africa,” he said. “What do you want Tiffany to do? Mine for diamonds in New York? It doesn’t work that way.”
Bernard Arnault, chairman and ceo of LVMH Moët Hennessy Louis Vuitton, got the Trump question as he went over annual results with analysts last week. He led with watchful caution, moved on to strength and optimism and wrapped up with flexibility.
“The USA is the world’s leading market. So, obviously, for us it’s very important to follow what’s happening,” Arnault said. “Currently, the market’s very promising, very buoyant. The atmosphere is, well, perhaps not euphoric but almost. You see that the stock market has topped the 20,000 mark. And the Dow Jones for the first time, that’s historic. Is all that going to continue? Well, I have to say that the measures that have been announced, the tax cuts, easing regulation and investments in infrastructure, all that’s pretty promising for companies that are in the United States….I don’t have the exact figure, but a large part of Vuitton products sold in the United States, are made in the United States. So we’re really quite immune there. And for the other products, we’ll see what happens. But then again, we do have some flexibility on the prices.”
That’s a good template for how to talk about the changes coming with Trump, but not everybody’s going to be able to sell it as well as Arnault, who’s the richest person in France and had a sit-down with Trump earlier this month.
Stuart Burgdoerfer, chief financial officer and executive vice president of L Brands Inc., also had a good answer to the Trump uncertainty earlier this month when he was asked a grab-bag question about the macro environment, border taxes, lower corporate tax rates and cash repatriation.
He actually managed to go further and turn the upheaval into an opportunity, at least rhetorically.
“It’s a complicated space,” Burgdoerfer said, diplomatically. “It’ll be dynamic. I don’t think anyone knows exactly what’s going to happen. We’re certainly paying attention to it, and participating as appropriate in the debate and the discussions. But I think it’s too early…to predict exactly what will happen. I know that our ability, our company’s ability, to adjust to whatever the new dynamic is is probably just about as good as anybody’s and that may sound like bravado, but we’ve just demonstrated an ability to adjust.
“Our sourcing and manufacturing capabilities are very strong,” he continued. “We have pricing power that comes from an emotional content leadership position. We’re not the low-cost kind of participant in our segments or markets…and [changes in the landscape] may actually create opportunity for relative advantage for us, given that.”
While nothing is sure, there’s a general sense, or hope, that whatever policy changes do come down, the commercially inclined part of Trump would not let it destroy the business climate.
Cowen retail analyst John Kernan said, “Over time, I think cooler heads will prevail. [Under Armour Inc. ceo] Kevin Plank was in the Oval Office [last week]; they’re educating Trump on how this all works.”
The stakes couldn’t be higher for certain brands.
“Some of the companies wouldn’t exist if they couldn’t feed off the cheap labor in Bangladesh,” Kernan said.
In the longer sweep of fashion history, Trump and any new tariffs he imposes could just feed into larger forces shaping the industry.
“There’s too many brands, there’s too much, everything’s shifting digital, too many people have relied on the brick-and-mortar community as their barrier to entry,” Kernan said. “E-commerce has brought down all barriers to entry to those businesses and, ultimately, the customer wants more of these authentic, smaller brands.
“The empires — the Calvins, the Ralph, Tommy Hilfiger, Coach, Kors — they’re under a lot of pressure,” he added. “They’ve opened a lot of doors, they’ve expanded into categories and now maybe the consumer doesn’t think they’re as cool as they used to be.”
Forget politics. Without coolness, there is no fashion business.