Implementing further tariffs in the escalating U.S.-China trade dispute could lead to as many as 12,000 retail store closures and threaten $40 billion in sales, according to a report by international investment bank UBS.
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The U.S. retail industry’s store count fell by 3,125 locations, or more than 5 percent in the first quarter of 2019, marking the steepest rate of decline in at least a decade, UBS analyst Jay Sole said in a note to investors. New tariffs would be especially damaging to leading retailers with earnings before interest and taxes (EBIT) margins of less than 3 percent, which operate more than 12,000 stores and account for $42 billion in revenue.
Eroding margins could cause an already accelerating trend of store closures to intensify. The closure of even 6,000 of the at-risk store locations would be “highly disruptive” to the retail industry as a whole, according to Sole.
“Our view is the market is not realizing how much brick & mortar retail is incrementally struggling and how new 25 percent tariffs could force widespread store closures,” the note said.
The Trump administration raised tariffs on $200 billion worth of Chinese products to 25 percent from a previous rate of 10 percent after negotiations between the two nations stalled earlier this month. President Trump has threatened to implement duties on an additional $300 billion in Chinese goods if an agreement cannot be reached.
Several U.S. retailers are urging the Trump administration to abandon the plan. Walmart and Macy’s executives warned that new tariffs would increase prices for customers, while a group of dozens of footwear retailers, including Nike and Adidas, said the plan would have a “catastrophic” impact on the economy.
“Our view is large scale store closures (12,000 store closures would represent over 10% of the fleet), would create intense inventory dislocations and discounting which would hurt almost all [softline retail] companies,” the UBS note said. “It could also make some [struggling] malls unviable, which would have a knock-on effect on healthy retailers, not to mention an impact on jobs and the larger economy.”
Payless ShoeSource, Gymboree and Charlotte Russe are just a few major retailers to close hundreds of stores this year.