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Retailers are generally having a tough time right now, and looming tariffs aren’t going to make it any better. President-elect Donald Trump’s tariff proposals — including 25% tariffs on all imports from Mexico and Canada and an additional 10% on goods from China — are widely expected to cause an increase in some prices as they raise sourcing costs. Consumers are already under strain and continue to clamp down on discretionary spending, while the Federal Reserve’s expectation for fewer rate cuts next year have only added to concerns about sticky inflation. The biggest risk for retailers heading into 2025 is renewed inflation, Bea Chiem, retail and consumer managing director at S & P Global Ratings, told CNBC. Trump’s 2018 tariffs came during a “relatively benign” period of inflation, whereas any increased levies today would come after retail prices have risen 20% to 30% since the pandemic, Chiem said. Companies have made efforts to source from other regions given the first tariff cycle and to remedy Covid supply chain snafus, but the risk remains. “The question now is, what else can they do?” Chiem said. “For the most part, consumers still have jobs, so they can spend, but they’ve been pulling back on discretionary purchases. This time around, manufacturers and retailers may have less pricing power and most companies will try to pass on any cost increases.” Against this backdrop, Wall Street sees some retailers focused on discretionary purchases, including sellers of home goods, as especially vulnerable to higher cost Chinese imports and a slowdown in consumer spending. Retailers that are less exposed to tariffs and can still offer attractive pricing for consumers are best-positioned to navigate next year’s ups and downs. “The winners are going to be those that can continue to have a unique value proposition,” S & P’s Declan Gargan said. Winning over the consumer Analysts view Walmart and membership-based warehouse Costco as well-positioned to navigate the year ahead, given their strong value propositions. “Discretionary spending remained weak for many retailers as consumers prioritized everyday essentials. COST and WMT stood out with positive discretionary comp sales growth this quarter, while most others saw flat or negative discretionary growth,” Bernstein analyst Zhihan Ma wrote in a Tuesday note to clients. WMT COST YTD mountain Walmart vs. Costco, YTD Costco exceeded analysts’ earnings and revenue estimates in its fiscal first quarter ended Nov. 24. Walmart also beat expectations and even hiked its full-year outlook. Shares of the companies are up more than 44% and 77%, respectively, in 2024. “Walmart, Amazon, Costco are the winners of the latest earnings cycle,” S & P’s Chiem said in an interview. “They all offer very unique value propositions, right. Walmart with their everyday low pricing strategy, Amazon with their competitive advantage in e-commerce and in Costco, you have the value per unit, right, the family that can afford to buy a bulk deal.” Walmart and Costco are also success stories in their efforts to ramp up their e-commerce offerings to boost profits. Both companies saw e-commerce sales spike in their most recent quarters. Walmart has been accelerating its use of automation across its supply chain through rolling robots and automated claws under the expectation that it will grow profits at a quicker pace than sales over the next few years. Ma said Walmart is better-positioned to achieve profitability, particularly compared to Target, in e-commerce given “its scale advantage and early investments in automated fulfillment capabilities.” E-commerce represents close to 19% for Target, followed by 17% for Walmart, Ma said, adding that, to be sure, both companies have noted that increasing digital efforts could weigh on margins. Target , meanwhile, is generally less well-positioned next year “given its need to play catchup on pricing,” Ma said. The company discounted thousands of items this year, mostly grocery and household staples, but still failed to beat third-quarter earnings and revenue estimates and cut its full-year guidance, partly due to higher supply chain costs. Retailers exposed to China tariff threats Target and discount chain Dollar Tree , which owns Family Dollar, are the stocks that could be most affected by China tariffs, according to Bernstein. Both companies also offer significantly more discretionary products, as opposed to staples, compared to stores like Walmart , Costco and Dollar General in the firm’s coverage. “We estimate that TGT and the DLTR banner have the highest exposure to Chinese imports … Depending on the nature and magnitude of additional tariffs this time around, retailers with meaningful exposure to Chinese imports could again face margin headwinds,” Bernstein’s Ma said in a Dec. 3 note to clients, adding that Trump’s 2019 tariffs had once already led to increased gross margin headwinds for Target and Dollar Tree, as well as home retailer Lowe’s. Home retailers, which have already been struggling given higher mortgage rates and less housing turnover, such as Lowe’s and Home Depot , import between 40% and 50% of their cost of goods sold, or COGS, Ma said. Discount chains, including Dollar Tree, this year have grappled with weak demand and strong competition from big-box retailers like Walmart and e-commerce sellers like PDD Holding ‘s Temu, which have managed to give steep discounts and appeal to price-conscious consumers across a range of incomes. Dollar Tree said on Thursday that its interim CEO would take on the role permanently as the company looks to make a turnaround. Discretionary-heavy retailer Target has similarly been hit hard this year, and analysts think its exposure to Chinese goods could create further headwinds. Bernstein noted that the company has the greatest percentage of COGS imported directly or indirectly from China, at roughly 50%. Chinese imports comprise mostly of consumer goods, electrical goods and appliances. The firm’s price target suggests the stock, which has already lost more than 8% this year, is overvalued and stands to lose another 8% over the next year. The FactSet consensus target suggests the stock has an upside of about 8.3%, on the other hand. Other retailers with significant exposure to China sourcing include Five Below , shoe retailers Skechers and Crocs and American Eagle Outfitters , according to Bank of America. Between 50% and 60% of Five Below’s sourcing is from China, the firm found. Skecher’s and Crocs get 40% and 30% of their goods from China, respectively, while American Eagle sits at about 20%. “We would expect to see higher levels of inflation and weaker consumer spending post-January 2025 if tariffs are enacted, which would be a headwind for discretionary retailers,” Bank of America analyst Lorraine Hutchinson wrote in an early November note to clients. Five Below, like Dollar General, has seen a 50% decline in its stock price this year. American Eagle shares have also lost roughly 22% as the apparel retailer struggles with value-seeking shoppers only wanting to spend during key shopping moments. Who’s safe? Some analysts mentioned Bath & Body Works as a stand-out name next year, given that 85% of what the personal care products retailer sells is sourced in North America. “We expect BBWI to withstand a consumer slowdown better than peers due to its affordably luxury stance and replenishment model,” Bank of America’s Hutchinson said. “This multiple reflects its history of, and our outlook for, consistent growth.” Her $45 price target on the stock suggests 16.6% potential upside for the stock, which is up roughly 20% this quarter but down more than 10.5% for the year. Bank of America earlier this week also added Bath & Body Works to its ‘Endeavor’ list of compelling small-cap stocks. S & P’s Gargan similarly mentioned the stock as a “more insulated” play given its minimal China sourcing. To be sure, the company could be impacted if consumer spending power gets further diminished, potentially leading to a pullback in overall discretionary spending.
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