One of the key election promises of President Trump was to levy a hefty tax on corporates who import goods into the U.S., thus encouraging local manufacturing and therefore domestic jobs. The Republican-controlled House of Representatives’ plan for a border tax includes trimming corporate income tax from 35% to 20%, while imposing a 20% tax on all imports and exempting export revenues from taxable income.
It’s quite clear that the border-adjusted tax would hurt the businesses of industries that rely on imports. Donald Trump had hinted that the "border adjustment" tax plan would be "too complicated." Analysts cited that the retail sector could be a victim of such a taxation policy. Nevertheless, retailers can now breathe a sigh of relief as the border adjustment tax loses some steam.
Let’s Analyze the Implications
Since the past few years the Retail-Wholesale sector has been bearing the brunt of sluggish economic growth, cautious consumer spending, stiff competition, strong U.S. dollar and volatile commodity costs. The implications were evident from retailers’ dismal sales and earnings growth performance in the recent past. Apprehensions surrounding the imposition of border tax on imported goods further aggravated the woes.
Retailers, who are heavily dependent on imported goods to remain competitive, argue that such a tax would compel them to increase prices of merchandises such as apparel, textiles, computers, electronic items, cars and other imported goods. Ultimately, shoppers will have to shell out more.
Moreover, such a tax would also lower retailers’ profits, since any significant change in prices could translate into lower volumes and sales. Industry experts believe that the border adjustment tax could wipe out retailers’ earnings per share by 50% or more. Further, the trading countries could also retaliate by imposing tariffs on goods manufactured and exported from the U.S.
There is another theory doing the rounds that the new tax regime would allow the dollar to appreciate against foreign currencies. This implies that companies will have to pay less to import goods. But there are concerns that if dollar fails to appreciate or does not appreciate to a level that can offset the burden, big companies will suffer. It will also be a nightmare for smaller companies who have less bargaining power to adjust cost.
Retail Stocks Likely to Benefit
The Retail-Wholesale sector has not been a spectacular performer. We note that over the past one year, the sector has registered an increase of 9.5% compared with the S&P 500 that advanced 14.4%. However, the recent rebound in oil prices, an encouraging employment picture, and a gradual improvement in the manufacturing sector and housing market signal that the economy is on a recovery mode. Amid such a backdrop, the retail sector presents itself as a lucrative investment hub.
Further, as talks of a border adjustment tax plan gradually tones down amid low fanfare, it could provide the much needed impetus to the sector. Stocks like Wal-Mart Stores, Inc. WMT, NIKE, Inc. NKE, Macy’s Inc. M, Best Buy Co., Inc. BBY, Nordstrom, Inc. JWN, and others are likely to gain in the near term, until the tax plan comes into shape.
Among the aforementioned stocks, Best Buy sports a Zacks Rank #1 (Strong Buy), while Wal-Mart, NIKE, Macy’s and Nordstrom carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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