Tariffs on clothing made overseas won't necessarily lead to higher prices, analyst says
The full impact of U.S. President Trump ‘s trade war, including tariffs, reciprocal tariffs and escalating tariffs on Chinese goods, has yet to be seen. And while there is currently a 90-day pause on Trump’s reciprocal tariffs on about 60 countries and territories, what might follow the reprieve, along with all the economic uncertainty in general, is affecting Canadian clothing retailers that make their products overseas.
Many apparel companies had already shifted production from China to other Southeast Asian countries such as Vietnam and Cambodia due to tariffs imposed during Trump’s first term.
And while many people assume that the tariffs will lead to higher prices on goods, this may not be the case for some retail companies — particularly those that don’t enjoy as much brand loyalty from consumers, said a senior analyst at Bank of Montreal who specializes in retail and e-commerce.
BMO analyst Simeon Siegel said there are ways retailers can absorb the cost of tariffs on production without necessarily raising the price.
“Tariffs do not give companies permission to raise price. Consumers give permission to raise price,” he said.
Siegel, who covers Lululemon Athletica and other apparel companies such as Nike and Birkenstock, said retailers might ultimately try to offset the higher tariff costs with higher prices, but if shoppers push back, discounts could return just as quickly.
The Vancouver-based Lululemon is one of many apparel retailers that could potentially be affected by Trump’s “Liberation Day” reciprocal tariffs, which included a 46 per cent tariff on Vietnam.
The company started moving its production to Vietnam in 2016, along with other companies that diversified manufacturing in recent years, in hopes of avoiding Trump’s previously imposed tariffs on China.
Last Wednesday, Southeast Asia was thrust into the same conversation as China, said Siegel.
“So, all of these companies that spent a lot of time and money believing they were de-risking their manufacturing, doing what they were supposed to be doing and moving into countries like Vietnam, found out they were going to be punished just as harshly, if not more,” he said.
Those companies saw their stock prices fall the day after Trump released his reciprocal tariff chart, with Aritzia taking the biggest hit on the TSX, its shares dropping more than 20 per cent, and Lululemon’s shares down nearly 10 per cent on the Nasdaq, as reported by the Canadian Press. Gildan shares were down almost ten per cent on the TSX.
Siegel said he believes the uncertainty of the tariffs has been “scarier” than their actual severity, as those retailers still don’t know the problem they’re trying to solve.
In a note to clients, Royal Bank of Canada analyst Irene Nattel said apparel retailers Aritzia and Groupe Dynamite Inc. , both of which source extensively in countries at the top of Trump’s tariff chart, have noted multiple tools to manage tariff-related margin headwinds.
Stephen McLeod, also an analyst specializing in retail for BMO, noted in early March that Aritzia currently sources about 35 per cent of its products from China, with the goal of bringing this down to 25 per cent in the fiscal year 2026. Aritzia fulfills 65 per cent of U.S. e-commerce orders from Canada, but the company could switch to 100 per cent U.S.-fulfillment in 2028 to 2029 with a new distribution centre in the U.S., he said.
Groupe Dynamite sources around 75 per cent of its products from China, with approximately 50 per cent of sales to the U.S. shipped from Canada, McLeod said.
Apparel, unlike other goods, are largely discretionary, so it would not be as easy to pass on cost increases as it would be for things people need and are not substitutable.
“There’s different ways to do all these, but the best way to offset a tariff is by raising price. That only works if you’re allowed to raise price,” Spiegel said.
Companies that are best positioned to raise prices to offset tariffs are those that have built strong connections with their customers. Not all companies have this luxury. Clothing companies that don’t have strong branding might have a harder time increasing prices.
Such companies can either cut costs elsewhere or bear the brunt of the pressure. Their next option would be cutting the cost of production, trimming fat or cutting corners — by, for example, lowering the quality of the product, Spiegel said.
With events everchanging, retailers now have to deal with the uncertainty surrounding tariffs.
“It makes less sense to try and fix the problem until they know what they need to solve for,” Siegel said.
• Email: dpaglinawan@postmedia.com
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