Retail stocks that had been surging this year with the bull rally have pulled back and now are at risk of falling even further as the renewed U.S.-China trade conflict threatens to sharply boost their costs. On Friday, the U.S. hiked tariffs on Chinese goods worth $200 billion from 10% to 25%. The Chinese government has vowed to take countermeasures, and President Trump has threatened to tax nearly all Chinese exports "shortly." Trump also tweeted that there is "no need to rush" negotiations with China on a trade deal, pushing U.S. stock futures lower.
Companies at risk include Target Corp. (TGT), Lowe's Companies Inc. (LOW), Best Buy Inc. (BBY), Costco Wholesale Corp. (COST), Dollar Tree Inc. (DLTR), Kroger Co. (KR), Walmart Inc. (WMT), and Home Depot Inc. (HD), per a report by Bernstein as outlined in a detailed Barron’s story. While retailers have been attempting to diversify their supply chain in light of the threat of heavy levies on Chinese imports, these measures take time to implement.
“A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses," said David French, a senior vice president at the National Retail Federation, as cited by the Wall Street Journal.
8 Companies at Risk as Trade War Heats Up
- Target Corp.
- Lowe’s Companies Inc.
- Best Buy Inc.
- Costco Wholesale Corp.
- Dollar Tree Inc.
- Kroger Co.
- Walmart Inc.
- Home Depot Inc.
Risks of Lower Consumer Purchasing Power
Before President Trump escalated trade tensions with China last weekend, the SPDR S&P Retail ETF (XRT) was up 11.1% year-to-date as of Friday close. That return has fallen to 7.7% as of Thursday afternoon, compared to the broader S&P 500’s 13.5% gain this year.
When higher costs are passed on to consumers through higher prices, consumer purchasing power decreases, leaving shoppers with the option to buy the higher cost goods or save their money. A study by Trade Partnership Worldwide, an organization against China tariffs, estimates that a 25% levy on Chinese goods would result in a $767 loss per four-person family in the U.S. annually, per the WSJ. A major problem facing retailers is that that even with consumer confidence and employment near the highest level in several years, U.S. consumers remain very budget-conscious. With shoppers more cognizant of price changes, any increase could hurt retail sales.
The Worst Off
Brandon Fletcher at Bernstein notes that stores with bigger grocery departments such as Walmart, Costco and Dollar Tree have “more robust sourcing teams” and will “likely see lower impacts” of tariffs. But the story is different for other companies, including electronics retailer Best Buy. "Those with high exposure to China and limited sourcing capabilities are likely to face a bigger impact despite efforts to mitigate tariff risk in advance over the past year,” says Fletcher. He says other vulnerable retailers include Target and Lowe’s, which have boosted their China exposure as they've moved to sell a larger volume of private label brands.
On a broader scale, any economic downturn sparked by trade wars could shake retailers further. With Trump indicating that he’s preparing to expand a 25% tax to a larger group of Chinese goods, the pain could be quickly transferred to middle class American consumers, and as a result, the retailers that sell to them.