Why Apparel Companies Rocketed Higher This Week

Shares of apparel and consumer goods companies with significant exposure to China, such as PVH Corp. (NYSE: PVH), Revolve Group (NYSE: RVLV), and Mattel (NASDAQ: MAT), rallied hard this week, increasing 14.1%, 15.5%, and 16.5%, respectively, as of 12:30 p.m. ET Thursday, according to data from S&P Global Market Intelligence.

The U.S. and China held talks last weekend and on Monday announced that they would be removing retaliatory tariffs announced last month for 90 days while trade talks continue.

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A welcome détente

Following the April 2 "Liberation Day," in which the administration announced high additional tariffs on many countries, China took a retaliatory step of raising tariffs on U.S. goods, while also restricting trade of certain critical materials, such as rare earths. The escalation spurred fears of an intense trade war. By the end of the counter tariffs and then the administration's retaliation to China's retaliation, tariffs on Chinese imports reached 145%, and China's duties on U.S. goods reached 125%.

That level of tariffs is highly punitive, essentially amounting to a freeze in trade between two nations. It would also be especially negative for companies with significant manufacturing operations or revenue in China, such as these three companies.

PVH, the owner of the Calvin Klein and Tommy Hilfiger brands, has significant exposure to China, both on the manufacturing, and revenue and profit side. While the percentage of products manufactured in China isn't disclosed, the company said in its recent annual report that most of its suppliers are based in Asia. On the profit side, things may be more dire, as PVH generated 6% of revenue but a much higher 20% of operating income in China in fiscal 2024. Also of note, China placed PVH on its "unreliable entities" list in February after the company refused to source cotton from China's Xinjiang region, which has been criticized for its forced labor camps of ethnic Uyghurs. President Trump had also put an initial 10% additional "fentanyl" tariff on Chinese goods that month even before April 2.

Revolve is an online fashion retailer that also has significant sourcing in Asia and China. Last year, management noted 22% of its inventory receipts were subject to tariffs, of which about 72% was sourced from China -- netting out to about 16% exposure to Chinese-sourced apparel.

Meanwhile, toymaker Mattel isn't an apparel company but also sources a lot of products from China. While Mattel has been working to diversify its supply chain to other countries, its CEO still noted in February that "less than 40%" of global production came from China -- which probably meant a number close to 40%. However, management noted that the U.S. only accounted for about half of global sales, so the China-to-U.S. exposure represented about 20% of revenue.

All in all, the incredibly high 145% tariff would have severely affected that portion of sales for all three companies. So when the U.S. and China came out with the statement that the two countries would relax their tariffs earlier this week as talks on trade and other issues such as fentanyl progressed, these three stocks had a big relief rally.

Image source: Getty Images.

But the matter still isn't resolved

Even though the administration has taken its most punitive tariffs down from 145%, the tariff rate on Chinese imports is still 30% while talks are ongoing. Moreover, China is still withholding some critical materials to U.S. companies, such as rare earths. In addition, it's not clear if the trade talks will bear fruit, since there are a lot of contentious issues to work out between the two countries.

These companies have already endured a tough past couple of years, with the rise in inflation and interest rates, and then this new phase of tariff wars. That has left PVH, Revolve, and Mattel down 48%, 78%, and 59%, respectively, from all-time highs, even after this week's rally. Therefore, these three stocks might be interesting turnaround situations to study for value investors seeking bargains.

While this week was a welcome relief, it's difficult to see any of these three stocks turning around in the near term in any meaningful way, as tariffs and their potential inflationary effects are likely to remain an overhang for some time.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group. The Motley Fool has a disclosure policy.