Traditional brick-and-mortar retailers have been feeling the pinch lately with struggling sales and cratering stock prices. The word ‘pinch’ actually puts it lightly.
In the past year, Macy’s announced plans to lay off 10,000 workers and close down 100 stores. It plans to focus more on its website and towards developing new concepts to combat deteriorating sales (according to CNBC). Even so, Macy’s stock has gone down -28% over the last 12 months.
Last year, Nordstrom retrenched around 130 tech employees and announced plans to lay off an additional 350-400 positions. Its stock has fallen close to -20% over the past year.
In January 2017, Sears Holdings announced its plans to close down 108 Kmart and 42 Sears stores. The company’s stock price has declined more than -50% over the past year, and there are already talks of its bankruptcy probabilities.
Several retailers have already filed for bankruptcy. This year, the women’s apparel chain, The Limited, files for Chapter 11 bankruptcy protection after it shut down all of its 250 stores, citing burgeoning digital shopping trend and declining mall traffic eating into the brick-and-mortar chain’s sales. Additionally, in November 2016, American Apparel filed its second bankruptcy.
Aeropostale did the same in May 2016, but a $234 million bid led by mall operators Simon Property Group Inc. and General Growth Properties Inc. saved 230 of the retailer’s U.S. stores from being shut down . (according to Reuters.com)
Some retailers – such as .
As if these companies do not have enough to worry about with soft consumer spending figures and competition from low cost ecommerce options like Amazon, there is now the potential for a “border-adjusted” tax on goods and services. If this tax makes a bad problem worse, it could spell doom for traditional retailers and their stocks.
A Briefing on the Proposed “Border-Adjusted” Tax
The tax overhaul, being pushed by Republican House Speaker Paul Ryan, proposes a lower corporate tax rate of 20% (compared to the current 35%), but also includes a tax designed to impact trade. Under the proposal, all foreign-made goods flowing into the U.S. would be taxed, while exports can leave the country tax-free.
The proposal has worried many U.S. retailers, including Wal-Mart, Best Buy and Target among others, all of which have long depended on low-cost imported goods to create inexpensive supply chains and sell inexpensive end goods to the U.S. consumer. So much so, that “a large number of CEOs” of several retail firms have made trips to D.C. in recent months to put forward their concerns, according to the senior vice president for government relations at National Retail Federation (as told to CNBC). Also, the Retail Industry Leaders Association (RILA) along with 120 other trade groups have joined hands for the Americans for Affordable Products campaign to fight the import tax effect on consumer prices (according to Bloomberg).
For many retailers, an import tax is a threat to their already pressured margins – this could force them to increase prices to cope with new taxes making their products even less competitive. In an environment where digital shopping portals already threaten their businesses, there is a lot riding on the outcome of this proposed tax.
On the other hand, supporters of the new proposal argue that the destination-based tax regime will bolster the U.S. dollar by boosting exports and dis-incentivizing imports. That should narrow U.S. trade deficits, and a stronger dollar should theoretically offset the effect of tax rates on retailers’ cost of imports.
Should You Sell or Short U.S. Traditional Retailers? What to Watch from Here
We don’t know how the U.S. tax reform will ultimately take shape, but if the code indeed ends up subsidizing exports while taxing domestic sales – much like Ryan’s proposal – it potentially could encourage exports at the cost of domestic supply overtime. Exports’ exemption from taxes could make selling to international markets more lucrative to some U.S. retailers. That, in turn, could potentially create supply shortage pressures in domestic retail market leading to a surge in domestic prices – a huge negative.
As of right now, the fact remains that it is too early to predict an outcome. What is proposed and what eventually gets implemented are almost always very different from one another.
Moreover, there’s still not been a clear indication of the President’s stance on Ryan’s proposal. In a meeting with various retail CEOs who’d come to express their concerns over the proposed import tax, Donald Trump said that the retail industry is “very important to the country” and that he’ll soon come out with his own tax proposal which people will “love.”
Our advice to investors at this point: don’t jump the gun. At Zacks Investment Management, we’ll be closely following how policy proposals progress into the legislative stages and what their potential impact could be on specific retailers along with other industries/companies, so we can help our clients manage their wealth with confidence. Irrespective of how the new tax policies eventually turn out, it shouldn’t hurt to plan investment strategies in advance, to fulfill your long-term goals. If you are not confident about your current financial plan, we can guide you on investments based on your specific objectives and risk tolerance. Feel free to contact us at 1-800-918-3114.
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