Denim Could Be a Big Loser in a Trade War With Mexico

(Bloomberg) -- If disappointing earnings weren't bad enough, retail investors now have to worry about the potential impact of new U.S. duties on all Mexican goods.

“This is unfathomable,” said Rick Helfenbein, president of the American Apparel & Footwear Association, in a statement. “Because of President Trump's tax increase, Americans will pay more for everything from jeans to cars to computers to machinery.”

Read more: Wall Street Slams Trump's Mexico Moves as a ‘Serious Risk'

The S&P 500 Retailing Index fell 1.4% at 2:41 p.m. in New York, on track to close at its lowest level in more than two months. Retail stocks are poised for a fifth consecutive week of declines as apparel earnings have mostly disappointed. Gap Inc., famous for its denim jeans, was the worst performer Friday after weak results.

“Additional levies on U.S. companies for imports would result in higher inflation hurting consumer spend,” Bloomberg Intelligence senior retail analyst Poonam Goyal said. “That could hurt sales for key denim makers like Levi, American Eagle, Wrangle, and Lee if they manufacture denim there.”

According to trade group, Mexico is the eighth largest supplier of apparel to the U.S. market and seventh largest supplier of footwear. It is the largest supplier of men's and boy's jeans to the U.S., accounting for more than a third of imports.

To be sure, retail exposure to Mexico is smaller than China, but food, upholstery products and consumer electronics are also likely to be affected, Telsey Advisory analyst Cristina Fernandez said in an email. Investors also see alcohol makers caught in the cross hairs, as shares of Modelo and Corona owner Constellation Brands Inc. fell the most since January.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editor responsible for this story: Catherine Larkin at clarkin4@bloomberg.net

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