UBS analyst: Tariffs could trigger mass inventory pileups, store closures for soft-line retailers
Higher costs and a looming inventory glut could force retailers to compete for wallets like never before.
Retail stocks have unraveled amid recent market volatility, with the ongoing tariff back-and-forth rattling an industry deeply reliant on imports. The SPDR Retail ETF is down 12% this year, and the consumer discretionary sector — which includes heavyweights like Home Depot, Nordstrom, and Foot Locker — is now the worst-performing S&P 500 sector year to date. UBS analysts warned Thursday that tariff pressures could spark the perfect storm for soft-line companies (those that sell literally “soft” merchandise like clothes, shoes, bedding, etc.) as a number of risks pile up. Risks like:
Tariff-induced price hikes
“Most companies likely bought inventory assuming no new tariffs. Now companies realize they will have to raise prices which means lower unit sales. The question is how will companies dispose of the extra units? It won’t be easy because almost every company in the industry will probably have this issue.”
Massive inventory overflow
“If we assume the industry will absorb excess units for 3 months before being able to lower unit volumes, this means the industry will probably build an excess of roughly 2.2-4.0 billion units of softgoods in Q3. To put this in perspective, TJX, ROST and BURL likely buy about 5 billion units of softgoods inventory in the US per year.”
Waves of store closures
“Our view is any brand or retailer losing money would be under pressure to reduce expenses and a main way to do that could be closing underperforming stores.
If 11,000 stores close because of tariffs, that would equate to 14% of the industry store count… This scenario would be highly disruptive, leading to further inventory builds and liquidation sales.”
Consumer competition
“Another problem Softline companies could face is they would have to fight to maintain wallet share against other discretionary categories which likely won’t experience the same level of price increases. For example, the price of tickets to a baseball game, movie, or concert likely won’t rise.”
UBS analysts had already downgraded earnings expectations for the soft-line sector, but still maintain their “buy” rating for off-price retailers TJX and Burlington Stores, seeing them as well positioned to weather the storm despite the tough conditions.
