MW 'Tariff Man' Trump returns next year. How nervous are retailers this time around?
By Bill Peters
'It's not at all clear that retailers either have the space or the incentive to absorb those price increases rather than passing them along,' economics professor says
President-elect Donald Trump has called himself "a Tariff Man." He has said tariffs are "the greatest thing ever invented." And he has described the word "tariff" as "the most beautiful word in the dictionary."
But many of the companies that make or sell the clothing, sneakers and other products Americans buy - including big names like Walmart Inc. and Nike Inc. - don't exactly see it that way.
In earnings calls after the election and in corporate regulatory filings, tariffs, or taxes on imports, often come up in the context of a threat to business and the burden they would force customers to shoulder in the form of higher prices in store aisles. That impact would land on top of a more than two-year spike in the cost of living that made higher prices for things like housing and groceries a core election issue.
Some executives on those calls have tried to project calm, citing Trump's first term in the White House as a tariff blueprint. But some have said they might raise prices even further in response to any trade battle. In the end, they may have limited flexibility - and willpower - to shield shoppers from the impact.
And after Trump campaigned on bringing jobs back to the U.S. and warding off competition from China, some retailers and apparel makers are already shuffling production plans, even as they say they can still manufacture goods elsewhere.
Trump has said he wants to institute tariffs of at least 10% on all imports, with a tariff of at least 60% on goods imported from China, a country that has long been a target of his trade policy. What is unclear is exactly what form those duties may take, whether they might land on businesses all at once or be phased in over time, and how much retailers might raise prices or change up production in response.
But just two days after the election, Steve Madden Ltd. $(SHOO)$, a shoe designer that sourced 79% of its products from China last year, said it would start to move production to other countries.
"Look, we have been planning for a potential scenario in which we would have to move goods out of China more quickly," Chief Executive Edward Rosenfeld said on the company's earnings call. "We've worked hard over a multi-year period to develop our factory base and our sourcing capability in alternative countries like Cambodia, Vietnam, Mexico, Brazil, et cetera. And so, as of yesterday morning, we are putting that plan into motion."
He added that "just under half of our current business would be potentially subject to tariffs on Chinese imports."
Walmart's $(WMT)$ chief financial officer, John Rainey, told CNBC this week that it might have to charge customers more if Trump's tariffs take hold - even as lower- and higher-income shoppers alike turn to the big-box retailer for bargains.
"We never want to raise prices," he said. "Our model is everyday low prices. But there probably will be cases where prices will go up for consumers."
The Trump camp has said tariffs - which the importing companies pay to the government - are a way to encourage people to buy U.S.-made goods, as well as a means to negotiate more U.S.-friendly trade deals, protect the nation's jobs and replenish a manufacturing base that shifted overseas as executives chased lower costs and higher profits. President Joe Biden has maintained or raised the tariffs Trump imposed in his first term on goods made in China.
But economists have worried that those tariffs will spark a trade war that would further squeeze consumers, as businesses raise prices to protect profit margins. Those higher prices could also prompt the Federal Reserve to temper its cuts to interest rates - after a period of keeping rates high in an effort to tame hot borrowing, hiring, spending and overall inflation.
Brett House, an economics professor at Columbia Business School, also noted that retailers' net profit margins often sit within the single-digit range.
"That implies to me that retailers do not have much room to absorb the tariffs themselves and avoid passing on those price increases to consumers," he said in an interview.
And he said that with consumers still spending, retailers might not have much of a problem raising prices in response to any cross-border trade battle.
"With households continuing to spend strongly, it's not at all clear that retailers either have the space, or the incentive, to absorb those price increases rather than passing them along," he said.
An analysis last year by Deloitte found that even in the back half of 2021 and the first half of 2022, when profit margins for corporate America soared, net margins for the world's biggest retailers came in a little above 4% on average. The National Retail Federation, a major U.S. industry group, said this month that tariffs on clothes, toys, furniture, appliances, shoes and travel items would "reduce American consumers' spending power" by $46 billion to $78 billion every year those tariffs remained in effect.
"The increased costs as a result of the proposed tariffs would be too large for U.S. retailers to absorb and would result in prices higher than many consumers would be willing or able to pay," the group said.
Home-goods retailer Williams-Sonoma Inc. (WSM) said on its earnings call this week that over the past few years, it had lowered the percentage of products it gets from China from 50% to 25%. And it said the U.S. was already a major manufacturing source, responsible for a lot of the company's upholstery, as well as things like lighting and its popular peppermint-bark candy.
Still, the company said it had a "category by category plan" to further pull back on making things in China if needed, and executives reminded analysts that it had weathered the tariffs from Trump's first term in the White House.
"We'll probably move some things to other countries," Chief Financial Officer Jeff Howie said on the call. "We may at some point in 2025 front-load some goods. I'm sure the vendors will pay some, and there may be some that the consumers absorb as well."
He added that there is "a lot of uncertainty right now. We're working through that. And as the landscape changes, we have the scale and strategy to pivot."
Ernie Herrman, chief executive of TJX Cos. $(TJX)$, which runs discount chains TJ Maxx and Marshalls, reminded analysts on the company's earnings call that it, too, had experience dealing with Trump's tariffs, and said direct imports were only a small slice of its business.
He said the company - which loads its aisles with merchandise cast off from other brands, retailers and manufacturers - might feel a little bit of impact from tariffs indirectly. But he said tariffs could leave it with more of that merchandise to choose from as manufacturers bring in goods ahead of time.
"If a brand were to get hit with tariffs ... and that brand had to raise their price and then that price gets carried on to another retailer, could that price on that one SKU for us be up a little? It might," he said. "But it will never be at any issue with the value gap that we have relative to the competition."
China's exports jumped 12.7% year over year in October, according to reports. Some analysts attributed the increase in part to businesses' efforts to stock up on supplies as they prepared for the possibility of a Trump victory.
Elsewhere, at least in the blanched language of corporate annual reports, companies have also said that tariffs would be kind of a pain.
Nike $(NKE)$, in its most recent annual report, said that it made around 18% of its sneakers in China, around half in Vietnam and a quarter in Indonesia. The company noted that higher tariffs and other trade restrictions could weigh on sales and affect how it sources materials.
"It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes," Nike said in its most recent annual report.
E-commerce giant Amazon.com Inc. $(AMZN)$, in its own annual report, said that sellers based in China "account for significant portions of our third-party seller services and advertising revenues, and China-based suppliers provide significant portions of our components and finished goods."
It added that regulatory and trade restrictions, among other factors affecting China, "could adversely affect our operating results."
Target $(TGT)$ - which recently said its own shoppers were still cautious about spending- said a "large portion" of its merchandise came from outside the U.S., with China as its biggest import source. Dollar stores Dollar Tree Inc. $(DLTR)$ and Dollar General Corp. $(DG)$ rely heavily on China for imports. Department-store chain Macy's Inc. $(M)$, in its most recent annual report, said it gets a "significant amount" of its private-label products from factories in China. RH $(RH)$, the "aspirational luxury" furniture chain, said in its annual report that it got around 22% of its products from China, when measured by dollar volume of purchases.
Elsewhere, sneaker maker Skechers USA Inc. $(SKX)$ said most of its products are made in China and Vietnam. Deckers Outdoor Corp. $(DECK)$, which makes Ugg boots and Hoka sneakers, also said it relies on those two nations for a lot of its production. The company said independent manufacturers source most of the sheepskin for its Ugg boots from two tanneries in China, which in turn get most of their sheepskin from Australia. Athleisure giants Lululemon Athletica Inc. $(LULU)$ and Under Armour Inc. $(UA)$ source a large part of their fabric from China.
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November 22, 2024 12:49 ET (17:49 GMT)
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