“There are no tariffs on webcasts,” joked Régis Schultz, chief executive of JD Sports, as he opened the sportswear retailer’s strategy update to the City.
Unfortunately, that was the limit of his insights into the effects of Trumpian economic warfare on a business that likes to point out that its 2,500 state-side stores make it bigger in the US than local icon Footlocker. The boast sounded better before the US whacked 40%-plus tariffs on countries such as Vietnam and Cambodia, the manufacturing source of many of the trainers and “athleisure” apparel in the shops.
JD’s answer to the tariff question was a big dunno. “At this stage, the outcome of these developments is uncertain,” said the company, stating the bleedin’ obvious. Even its forecast that pre-tax profits this year will be between £878m to £982m came with the enormous qualification that it “excludes any potential impact from changes to tariffs”, which makes the prediction meaningless.
But one can’t blame Schultz for such vagueness. Trying to model this stuff is genuinely pointless when US tariffs on China, for instance, can double in a day. In JD’s case, it isn’t sourcing most of its US products directly from overseas, but is buying from those who do – Nike, Adidas, New Balance and so on. On the safe assumption that Nike et al won’t volunteer to absorb 100% of the tariff impact in their profit margins, the first big question is how the arm-wrestle between manufacturer and retailer plays out. JD starts from the position of being the biggest on its side on the table; on the other hand, it is in a market where brands reign supreme.
Then there is a huge unknown of what price increases US consumers will swallow, and what happens to consumer confidence along the way, including in the two-thirds of JD’s business that is not in the US. It may be at least six months, one suspects, before it is able to offer useful reports on the real-world effects. Even then, it may be hard to separate the tariff whack from other factors – the sports fashion world, for example, has been slowing for at least two years, especially in the UK.
Yet another variable is the extent to which manufacturers with global supply chains can play the tariff rate card game of switching between locations. It is a fantasy to think many shoe and garment factories will migrate to the US but Turkey, with a baseline 10% tariff, may be an alternative to Asia.
The multiple uncertainties are a downer for investors but one also understands why JD’s shares rose 10% on (another) big down for the FTSE 100 index. At 69p, JD – after a rocky few years of profit upsets and heavy spending on logistics and IT systems – is rated at just six times earnings and is currently generating enough cash to afford a £100m share buy-back.
In normal circumstances, you’d call that cheap. It isn’t cheap if a proper Trump-inspired deep global recession is on the cards – trainers are the ultimate deferrable purchase. But the bit we don’t know is how retailers and supply chains will adapt and automate. The pass-through effects of US tariffs probably won’t be straightforward.
