Sneaker, Clothing Makers Sink on Tariffs Leaving Nowhere to Hide

(Bloomberg) — In President Donald Trump’s first term, apparel and footwear makers shifted manufacturing out of China to avoid tariffs. Now they’re being pummeled as Trump targets the same nations they moved to. 

A tariff of 46% on goods from Vietnam is particularly painful for companies such as Nike Inc., Adidas AG and Lululemon Athletica Inc., which produce significant amounts of merchandise in the country. Levies of 49% on Cambodia and more than 30% on Indonesia and Thailand are also problematic. Trump says the tariffs will push companies to relocate manufacturing to the US. 

“There’s nowhere to hide,” said Mary Ross Gilbert, an analyst at Bloomberg Intelligence. “This means apparel brands will most certainly be forced to raise prices,” she added. 

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Shares of apparel and footwear companies have plunged across the globe following the tariff announcement. In New York trading, Nike, Lululemon, Gap Inc. and Under Armour Inc. all fell more than 10%. while in Frankfurt, Adidas dropped as much as 12% and Puma SE declined as much as 14%. Hennes & Mauritz AB, Pandora A/S and JD Sports Fashion Plc also fell. 

In Hong Kong, shares of Shenzhou International Group Holdings Ltd., which makes products for US brands including Nike in Asia, fell 14%, the most since 2008.

Analysts from Jefferies estimate that only about 2.5% of the US apparel market and 1% of footwear are produced domestically. Vietnam exported $44 billion in textiles last year, with the US as its largest market, according to the nation’s textile and apparel association. 

Analyst Randal Konik wrote that Trump’s tariff plans have rendered companies’ mitigation strategies, announced during fourth quarter earnings, “essentially fruitless.” 

Related: Tariff Whiplash Clouds Outlook, Prices at Target and Costco

UBS analysts, led by Jay Sole, wrote that “one of the biggest surprises” is how every company in the apparel industry will be impacted. “Our view is that, given how extensive the list of tariffs is, the industry will realize there are few ways to mitigate the impact in the medium term other than by raising prices,” they wrote. 

About half of all Nike brand shoes and 39% of Adidas shoes are made in Vietnam, according to regulatory filings, with the country being the largest supplier of footwear for both companies. Nike has already said it expects its gross margin to decline sharply this quarter, in part due to US tariffs on products from China and Mexico. 

Vietnam has low labor costs, a skilled workforce already adept at manufacturing shoes and clothes, transportation infrastructure, and was seen as less of a threat to be involved in geopolitical clashes amid rising US-China tensions. It also boasted trade agreements with the US and the European Union.

Hints that Vietnam could get entangled in Trump’s trade wars began in 2019, when Trump said that Vietnam took advantage of the US “even worse than China.” The country has been among Asia’s fastest growing economies. Its gross domestic product grew 7.1% last year, surpassing both government projections and estimates from analysts surveyed by Bloomberg.

Bond Declines

The impact of the tariff announcement wasn’t limited to equity markets — or apparel and footwear companies. Bonds sold by Michaels Cos. and Saks Global were among the biggest high-yield decliners on Thursday morning, dropping 5 to 8 cents on the dollar, according to Trace. Dollar-denominated notes from Wayfair Inc. and PetSafe also fell as investors gauged the companies’ exposure to tariffs.

The levies will inflict more pain on an industry that’s already struggling with surging labor costs and a liquidity crunch. That’s contributed to bankruptcies by retailers including Joann Inc. and the operator of Forever 21 stores. 

Related: How US Tariffs Work — and Who Foots the Bill

China has vowed to retaliate against the US, putting the world’s largest economies on a collision course that could further upend global supply chains and imperil economic growth. The EU issued a similar warning, with leaders raising the prospect of potential retaliatory tariffs and targeting American services and technology companies.

Higher prices resulting from the new tariffs are poised to strain consumers who are already under pressure following years of high inflation. They also increase the likelihood of a recession, according to some economists. 

“Tariffs are a tax paid by the US importer that will be passed along to the end consumer,” said David French, executive vice president of government relations at the National Retail Federation.

Adidas and Puma will probably need to raise their prices by about 5% around the globe in order to maintain current profitability levels, James Grzinic, an analyst at Jefferies, said in a note. 

On Holding AG, the Zurich-based shoemaker, is also in the cross-hairs. Last year, it produced 90% of its footwear in Vietnam and 10% in Indonesia while nearly two-thirds of its revenue came from the Americas — mostly the US — according to filings. Shares of the New York-listed company fell as much as 17% in New York on Thursday. 

On said in an email that it regularly assesses and updates its supply chain and is confident that the strength of its brand will enable it to navigate uncertain and volatile environments.

 

Just days after Trump re-entered the White House in January, Secretary of State Marco Rubio encouraged senior officials in Vietnam to address trade imbalances. Vietnam’s trade surplus with the US was more than $123 billion last year, according to US Census Bureau data, and officials have said they’ve been urging increased purchases of US products. 

Only China and Mexico have larger trade surpluses with the US.

Vietnam Prime Minister Pham Minh Chinh said in January that he’d be willing to visit Trump at Mar-a-Lago to “golf all day long” if it helps resolve trade quarrels. Since then, the government has been trying to appease the Trump administration by cutting its own tariffs on US cars, ethanol and liquefied natural gas.

–With assistance from Subrat Patnaik, Kit Rees, Dorothy Ma, Emily Cohn and Eric Pfanner.

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