Nike (NKE) supply lines and sales in China are sending shares lower as signs of a more belligerent Sino-American trade war build on President Trump's Twitter (TWTR) timeline.
...We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!
— Donald J. Trump (@realDonaldTrump) August 1, 2019
...during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%...
— Donald J. Trump (@realDonaldTrump) August 1, 2019
Shares of the Oregon-based shoe and apparel manufacturer slipped over 3% after Trump's tweets that indicate an outsized effect on apparel and footwear retailers (XRT) and continue to trend in the red as the noise settles on Friday.
Company filings specify that 23% of footwear and 27% of apparel manufactured by Nike originates in China, while FactSet pegs its sales in China at 15% of revenue, indicating a double effect on the retail name and a higher exposure than competitors like Adidas (ADDYY) and Under Armour (UAA) .
"We are disappointed the administration is doubling-down on a flawed tariff strategy that is already slowing U.S. economic growth, creating uncertainty and discouraging investment. These additional tariffs will only threaten U.S. jobs and raise costs for American families on everyday goods," National Retail Federation Senior VP for Government Relations David French said in the wake of the impact. "The tariffs imposed over the past year haven't worked, and there's no evidence another tax increase on American businesses and consumers will yield new results. We urge the administration to bring our allies to the table and find new tools beyond tariffs to achieve better trade relations."
The impact on retail is particularly ill timed as it hits right into the "back to school" season, key for retailers to refresh sales. Retailers are now faced with the prospect of either squeezing margins significantly or passing on costs to consumers and potentially slowing demand dynamics.
"Our biggest concern now is this comes right into Back to School/Holiday," Piper Jaffray analyst Erinn Murphy told clients on Friday. "Goods have been priced & contracts for future orders have been inked. This does present near-term pain for 2H gross margins (even at just a 10% tariff) as reticketing goods intra-season can be tricky."
She said the upcoming round of tariffs "adds insult to injury" as department stores suffer already and Amazon (AMZN) affects sales prospects.
To be sure, Nike is a retailer that has worked diligently to reduce its China exposure, moving much of its manufacturing to Vietnam amid the Trump administration's aggressive stance in the trade war.
At present, 49% of footwear for the company is manufactured in Vietnam, up from 44% prior to Trump's trade policies, while Chinese exposure has been reduced 6% since the start of 2017.
TOMORROW on @CNBC: we are LIVE in Hanoi, with a look at how American brands are shifting supply chains out of China - and into Vietnam. ����
(Like this factory that makes Nike and Adidas clothing.)#MadeInVietnam
— Carl Quintanilla (@carlquintanilla) June 24, 2019
All day Tuesday �� pic.twitter.com/8VsbfK6gVG
The issue that is hurting Nike and its sector is the time it takes to fully move supply lines and uncertainty surrounding the ability of companies to contain costs amid moves.
"Should production start to move further out of China, we see risk to longer lead times [and] pricing pressure in surrounding markets," Murphy advised clients.
She cited key Nike markets Vietnam, Cambodia, and the Philippines as key risks.
While news flows through into the September 1 tariff imposition, investors eyeing opportunities in retail will need to be very selective, while remaining aware of when anxiety begins to break as trading opportunities could emerge.
To hear more about Nike and other stocks that could be prescient names to get greedy on as fear foments, continue to follow Real Money.
(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.)
