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UBS: 3 Top Retail Stocks Best-Positioned For New Tariffs

As if the retail sector didn't have enough to worry about, a new threat has now emerged. On August 1, President Trump announced that the US is implementing 10% tariffs on a further $300 billion of Chinese goods, starting September 1. On the announcement, retail stocks plunged, with the SPDR S&P Retail ETF down over 3%.

“The list of products these tariffs will hit are almost entirely consumer oriented… This new 10% tariff on Chinese imports is a direct hit on consumer products and family budgets, plain and simple” the Retail Industry Leaders Association wrote in a statement.

Most retailers expect to pass the tariffs on to consumers, and multiple price rises could damage overall consumer spending. “We’re very concerned this will be a long-term cost baked into what consumers will pay,” Matt Priest, chief executive of the Footwear Distributors and Retailers of America, said in The New York Times.

And UBS analyst Jay Sole didn’t provide much reassurance when he told investors: “Department store P/E valuations look low today, but the market may be underestimating how negatively impacted their earnings might be from tariffs.”

In particular, the analyst singled out names like Macy’s (M), Nordstrom (JWN) and Kohl’s (KSS) as most at risk. This was a call echoed by other firms including Goldman Sachs and Credit Suisse. Nordstrom, for example, is currently trading down a whopping 34% year-to-date. That’s with a Hold analyst consensus.

However there are still some retail names that look compelling. UBS has singled out three specific names with the least risk attached. These are the stocks best-positioned to outperform with the new tariffs says the firm. Let’s take a closer look now:

Nike Inc (NKE)

Just do it. The sportswear giant has managed to maintain significant Street support despite the tariff updates. It’s hard to deny that Nike has considerable China exposure. Company filings reveal that 23% of Nike footwear and 27% of apparel is manufactured in China, while FactSet calculates that 15% of Nike revenue is directly tied to the region.

Nonetheless the stock’s diversified global footprint and strong pricing power are keeping analysts on-side. “Fundamentally, NKE is arguably in its strongest position over the past few years, with robust CC revenue growth, healthy underlying gross margin expansion, a continued eye on the horizon through transformational investments, and strong/healthy growth in DTC/digital” cheers five-star Guggenheim analyst Robert Drbul. He has a buy rating on the stock and $100 price target.

Indeed, best performing analysts have a bullish Strong Buy consensus on Nike right now. In the last three months, the stock has received 8 buy ratings vs just 1 hold rating. Meanwhile the $98 average analyst price target suggests sizable upside potential of just over 20%.

Lululemon Athletica (LULU)

Lululemon is excelling in the rapidly growing world of athleisure. The company is another retailer singled out by UBS as having the least risk to the new tariffs. Lululemon imports only 6% of its total finished goods from China, limiting its direct exposure.

"We are committing to higher air-freight usage as the hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases," Lululemon CFO Patrick Guido revealed on the June earnings call. However the higher costs associated with increased import duties and air cargo are likely to keep gross margin "flat to modestly up" this quarter, vs 54.8% last year, Guido added.

Year-to-date the stock has soared 47%, boosted by stellar first-quarter earnings results and a new customer loyalty program. “We continue to see Lululemon uniquely positioned at the intersection of trends and positioned well to both recruit new consumers to the brand and expand the offering to generate more revenue per guest,” wrote Stifel Nicolaus analyst Jim Duffy.

He believes the new loyalty program, named ‘Practice’, can yield $0.50-plus in incremental earnings power “and more aggressive assumptions point to potential for a $1-plus boost for future years.”

Top analysts have a cautiously optimistic take on LULU, with a Moderate Buy consensus. That breaks down to 11 buy ratings and 5 hold ratings published on the stock in the last three months. The $197 average price target indicates upside potential of 10% from current levels.

VF Corp (VFC)

VF Corp boasts a diverse portfolio of popular brands including Vans and The North Face. It’s the third stock singled out by the firm as best positioned to cope with tariff risk.

As VFC itself states “The word that best describes our global sourcing strategy is “balanced.” We’re not overly dependent on any given region or country. This allows us to competitively manage cost, as well as source closer to end markets.” According to the company, China accounts for 9% of produced VF units. That’s with Americas responsible for 35% produced VF goods, and Vietnam 25%.

Overall, we can see VFC still scores a Strong Buy consensus from top analysts. Out of 6 analysts polled, 5 rate the stock a buy. Plus the $100 average analyst price target translates into upside potential of over 20%.

“VFC is one of the best managed and operationally efficient companies in our coverage universe and the spin-off of the slow growing Jeans business further enhances its growth profile, in our view. VFC continues to evolve its portfolio to ensure resources and focus are allocated to the fastest growing brands that are generating the highest return on investment” cheers top Susquehanna analyst Sam Poser.

He notes that the strong success at Vans (up 20% in 1Q20), and now The North Face is a positive indicator of future growth at VFC’s other brands including Timberland and Dickies.

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