The end of ‘De Minimis’ is anything but that.
Written by Julian Wheeler – Partner and US Equity Specialist
On April 2nd, President Trump unveiled his ‘Tariff Board’, one of the most extraordinary back-of-a-cigarette-packet pieces of policy ever produced. Naturally, it has been subjected to multiple changes, delays and outright legal challenges, so it is natural that markets have struggled to ascertain the true impact, lurching between dismay and nonchalance. However, there is one measure which has received far less attention until it came into force last month, one that may have a far greater impact than appreciated on certain sectors of the US economy.
The end of the De Minimis tax exemption in the USA, which previously allowed goods into the country duty-free if their value was $800 or less. (In the UK, we still have it in place, although under review, at a much lower £135 threshold). This tax loophole allowed a global trade in e-commerce to thrive, whereby goods from all over the world could be purchased by and then sent to individual US customers. Think of the Chinese retail giants Shein and Temu who clearly benefitted from this and against whom the removal of this exemption was probably squarely aimed. It has been estimated that over 90% of all packages destined for the USA are valued under this exemption threshold.
The list of affected companies is likely to be a long one; logistics companies such as FedEx and UPS; many other areas of the transport sector, freight forwarders, packaging, warehouses and depots. See if you can add a few more I haven’t mentioned! But the first big casualty was unexpected and came only a month into this change: Lululemon.
The Canadian maker of branded ‘performance’, social’, and ‘lounge’ wear – their terms – produced earnings that were respectable but gave guidance that was…. well, shabby. Now, I could talk about how this company, along with its share price, has been in trouble for a while thanks to a high-priced product range that has become a “predictable offering” – again, their words – who now face multiple new entrants in the same way that Nike has seen. I could continue to suggest that while Nike has changed management and direction, Lululemon appears intent on continuing with their current strategy of expanding away from their core strengths in “performance” (premium clothes for the likes of yoga teachers and higher-end fitness enthusiasts) in favour of moving downmarket to appeal to a wider market in casual wear. This might well continue to pressure margins with lower prices and alienate their core customer. They may very well repeat the errors made by Gap over a decade ago, who by moving away from their core ‘Khakis’ into bright colours lost their way very badly indeed.
However, that is all to be revealed in the future. Leaving aside what they can control, let us turn to the real bombshell on the earnings call, which was the revelation that the end of the De Minimis tax exemption was going to affect 66% of their sales to the USA. Say that again? Effectively, it appears that about $2bn of sales were being sent from Canada in onesy-twosey packages and avoiding Duty. With that now being due, according to some reports I have read, it is going to cost them about $300m or about 250 basis points in margin. And that is NOT a ‘one-time charge’. So why on earth didn’t we know this already, why hadn’t the company identified this risk and communicated the extent of it to the analysts by now? After all this has been talked about for some time. Apparently, when questioned on the call, Management thought this would happen in 2027, not this year, so it wasn’t an issue at this point. Really? Perhaps it is just fortuitous that they have over-shipped and increased unit levels of inventory by 13%.
I wonder who else out there thought Trump was just a ‘TACO’? That he is ‘all bark and no bite.’ One of the obvious retailers dependent upon an external inflow of goods is Etsy, whose shares tumbled sharply as soon as this new tax came into effect. This might present an opportunity in my opinion, as their platform may benefit from AI-related changes to advertising and they can surely shift the assortment in favour of domestically sourced products; but that’s for another day. Meanwhile, as the tax and tariff changes do indeed come into play, we will find out if anyone else ‘has been swimming naked when the tide goes out’ to quote one of my favourite “Buffettisms”.
For more background on our U.S. market views, visit the Over the Pond archive.
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