US retailers in spotlight as fresh tariffs kick in
• Clothing and electronic goods to bear brunt
US retailers will be front and centre on Wall Street this week after the US imposed new tariffs on $300bn worth of Chinese imports, including clothing, televisions and jewellery.
The tariffs on Chinese goods will hit consumers more directly than duties already levied on $250bn worth of imports. Retailers are scrambling to cut costs and find ways to minimise the damage to their bottom lines, while Wall Street analysts try to identify those best positioned to weather the taxes.
The US government imposed tariffs on the newest list of products on Sunday, with tariffs on about half of those goods delayed until December 15 in a bid to soften their impact on holiday shoppers. President Donald Trump upped the tariffs to 15% from an originally planned 10% in mid-August.
Trump’s aggressive stance and often mixed signals in the trade war have taken a toll on Wall Street in recent weeks, especially on the shares of firms that rely heavily on China.
The September 1 tariffs include consumer electronics worth $52bn, including smart speakers, earbuds and televisions, according to the Consumer Technology Association, an industry group.
Tariffs kicking in on December 15 include consumer electronics worth $115bn. That includes smartphones, laptops and video-game consoles, directly hitting tech firms, including Apple and Microsoft.
Investors are looking for retailers most able to hold prices steady without hurting their margins, or increase prices without hurting demand for their products. They are also looking for companies that rely less on China for their wares.
“We’re leaning in on quality across our hardline retail universe, favouring retailers with scale, pricing power in respective categories, less elastic products, and a greater focus on [professional] influenced sales and initiatives,” Wells Fargo Securities analyst Zachary Fadem wrote in a report.
On that basis, Home Depot and Lowe’s Companies are best positioned to weather the tariffs, relying on China for 10% or less of their cost of goods sold, Fadem wrote.
At the other extreme, Best Buy last Thursday gave a lowerthan-expected full-year outlook, blaming tariffs and uncertainty about future consumer behaviour, sending its stock down 8% and extending its loss to 17% in August.
Executives on Best Buy’s analyst call said about 60% of the consumer electronics retailer’s cost of goods sold comes from China. It is working on lowering that to 40% in 2020.
Barclays has compiled a basket of companies affected by the trade war, including consumerfacing companies it estimates receive more than 40% of their sales from products imported from China, including Apple, Nike and Whirlpool. The basket fell about 8% in August, underperforming the S&P 500.
The tariffs that kicked in on September 1 will affect $39bn worth of footwear and clothing, with the December tariffs set to hit another $12bn worth, says the American Apparel & Footwear Association.
Heavyweight retailers, including Walmart, Costco Wholesale, Target Corp and Home Depot, can adjust their global supply chains and use their clout to force suppliers to accept smaller margins to offset the tariffs, giving them an advantage over smaller competitors.
Demonstrating that investors are willing to buy retailers positioned to weather the trade war, Walmart has gained 7% since its quarterly report on August 15, when it said it had increased the prices of some of its items due to tariffs but was not passing all the cost pressure it faces on to consumers.
Target has surged 26% since its August 21 quarterly report, when it boosted its full-year profit outlook, even after accounting for potential additional tariffs.
A letter last week to Trump from more than 200 US footwear companies, including market leaders Adidas and Foot Locker, warned that the tariffs would worsen economic uncertainty and could drive up prices in other countries that produce footwear, given limited production capacities.
Abercrombie & Fitch slumped 15% on Thursday after the apparel retailer cut its fullyear sales forecast in anticipation of the new tariffs.
HEAVYWEIGHT RETAILERS CAN USE THEIR CLOUT TO FORCE SUPPLIERS TO ACCEPT SMALLER MARGINS TO OFFSET THE TARIFFS