What is the risk from the new U.S duties on China for European sporting goods name

Investing.com -- The impending expansion of U.S. import duties on Asian exports presents a risk for European sporting goods brands, particularly those with a high reliance on Vietnamese sourcing. 

According to analysts at BofA Securities, the forthcoming tariff measures could lead to a sharp margin squeeze and amplify existing challenges posed by weakening U.S. consumer demand.

While European sporting goods brands have significantly reduced their dependence on China for U.S.-bound exports—Adidas now sources just 3-4% and Puma (OTC:PMMAF) about 10% from China—their reliance on Vietnam and the broader Asian supply chain remains substantial. 

Vietnam alone accounts for at least 50% of global sourcing for adidas, over 60% for Puma, and more than 95% for On, with even higher shares for their U.S. business. 

Specifically, Vietnam accounts for 27% of adidas’ sourcing, over 30% for Puma, and 88% for On, making the country a primary target for U.S. trade action.

BofA Securities analysts point to Vietnam’s more than $100 billion trade surplus with the U.S. and its history of currency undervaluation concerns as reasons it is likely to be included in new tariff measures.

If the U.S. government moves forward with a 10-percentage-point tariff increase on all U.S. footwear imports, the impact could be severe, particularly for On, which has virtually no alternative production sources.

The report estimates that a 10-percentage-point increase in U.S. import duties would trigger a mechanical 4-percentage-point gross margin hit on European brands’ U.S. business before any corrective pricing actions. 

If only Vietnam is affected by new duties, On would face a significantly larger impact. While On’s premium positioning gives it some pricing power, adidas and Puma face a more constrained ability to pass costs on to consumers.

For On, the concentration risk is especially high. If Vietnam alone is targeted, the company would take the hardest hit. By contrast, JD Sports is insulated from direct impact, as it negotiates gross margins with its suppliers rather than managing production directly.

The report also underscores that U.S. consumer demand is already faltering. Recent data shows slowing retail sales, deteriorating BAC credit card spending, and rising unemployment, all of which compound the risks facing European brands. 

With the U.S. accounting for about 40% of total industry sales, a prolonged downturn could push back expectations for a sector recovery beyond 2025.

Currency dynamics add another layer of uncertainty. While a stronger dollar typically pressures European brands by raising sourcing costs, the recent weakening of the currency has provided some relief. However, should trade tensions escalate, the dollar could strengthen again, adding further margin pressure. 

A 1-percentage-point appreciation of the dollar could result in an estimated 30-basis-point negative impact on gross and EBIT margins for adidas and Puma, though On would face a smaller hit.

In response to escalating trade risks, On is accelerating its upstream integration efforts. The company is constructing production facilities in Zurich and South Korea, aiming to produce hundreds of thousands of shoes by 2027. 

This move, while still in its early stages, could provide long-term insulation from supply chain disruptions. However, for adidas and Puma, nearshoring remains an unviable option due to cost constraints and the need for volume production.

Despite the looming risks, BofA Securities has maintained its ratings on European sporting goods stocks. 

On remains a ‘buy’ given its ability to offset higher tariffs through pricing power and upstream investments. 

JD Sports also retains a ‘buy’ rating due to its lack of direct exposure to production-side tariffs. Adidas (OTC:ADDYY) holds a ‘neutral’ rating, reflecting its average pricing power and Vietnam sourcing exposure. 

Puma, with its combination of higher Vietnam exposure, lower pricing power, and currency vulnerability, has been rated ‘Underperform.’

As the April 2 deadline for new U.S. tariff announcements approaches, European sporting goods brands face mounting uncertainty. Should tariffs extend beyond China and impact Vietnam, the consequences could be substantial, particularly for On and Puma. 

With U.S. demand already showing signs of fatigue, brands will be closely monitoring the situation to determine whether pricing adjustments, supply chain shifts, or cost-cutting measures will be necessary to mitigate the impact.