By Sabrina Escobar
Markets rallied Wednesday on the prospect that Donald Trump's second term will bring a more business-friendly environment. But several retail stocks slumped on concerns that the former president's hard-line approach to tariffs will weigh on performance.
Shares of some dollar stores, furniture and appliance retailers, toy makers, and a smattering of apparel brands closed in the red Wednesday, even as the SPDR S&P Retail exchange-traded fund gained 2%.
The disparity reflects how investors are factoring in a specific company's exposure to higher tariffs as they position themselves for the postelection cycle. Trump has proposed several tariffs, including a baseline levy of 10% on all imports and an additional fee of 60% on Chinese imports. He also threatened to impose a 25% tariff on Mexican goods unless the country stems the flow of migrants into the U.S.
These levies could weigh on retailers' margin growth and profitability, analysts say. That said, the tariffs will impact certain consumer companies more than others, and the final toll varies on a host of factors, including how much a company imports from China, its pricing power, and margin structure.
Some companies, like auto parts dealers, will be able to more easily pass on the added fees than others, such as dollar stores, home furnishings, or sporting goods, said John Tomlinson, global director of research at analytics firm M Science. Shares of O'Reilly Automotive closed 6% higher Wednesday, while Five Below, Dollar General, and Dollar Tree shed 10%, 5%, and 7%, respectively. Wayfair closed 8.8% lower, and Dick's Sporting Goods was off 1.5%.
Bigger companies, such as Walmart and Amazon.com, are also better positioned to navigate the tariffs, Tomlinson said, as they have the scale and flexibility to find alternative suppliers faster or use their size to negotiate more competitive prices.
Mitigation strategies could also come into play. Following the initial wave of tariffs imposed during Trump's first administration, many companies have already moved much of their production for U.S. goods outside of China.
E.l.f. Beauty -- a company that analysts say has a large exposure to China -- has been gradually shifting its U.S. production base away from China and will continue to do so in the coming months, CEO Tarang Amin told Barron's Wednesday.
SharkNinja and Yeti, two other companies that fell victim to the retail slump Wednesday, have also reduced their reliance on China in the past five years, making the market's reaction seem "overblown," wrote Randal Konik, an analyst at Jefferies in a Wednesday note. SharkNinja stock fell 2% and Yeti closed 3% lower.
"We anticipate minimal disruption for both companies, as their management teams have proactively planned for a Trump-win scenario," Konik added, noting that the current pullback presents a buying opportunity for the shares.
That planning will extend well into the coming months as the new administration goes about turning campaign promises into policy.
Freight experts predict many retailers will pull forward some of their orders to get imports in before any higher tariffs kick in. That happened following the first wave of tariffs Trump imposed on China in 2018 -- U.S. imports hit a record that year -- and could happen again.
"The potential for a jump in imports ahead of tariffs has been discussed in the shipping markets, but to what degree this would occur remains to be seen," wrote Omar Nokta, an analyst at Jefferies, in a note Wednesday.
Neil Saunders, managing director of retail at GlobalData, agrees. Retailers will be hoping that Trump's words are more of a threat to aid negotiation than settled policy, and will wait until terms are completed before making any decisions, he said.
"If and when the tariff picture becomes clearer, then we could well see a pull forward of orders," Saunders wrote to Barron's. "That will cause all kinds of disruptions including pushing up shipping rates, increasing warehousing costs, and tying up more capital."
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 07, 2024 02:30 ET (07:30 GMT)
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