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In recent months, several retailers have flagged potential risks to their business from the tariffs and said they were working with suppliers or moving sourcing elsewhere to keep prices in check.
U.S. retailers could face pressure from President Donald Trump's tariff and immigration policies, with levies on Chinese goods seen as the most significant risk, according to an analyst.
Target Corp (TGT) and Dollar Tree Inc (DLTR) are the “most exposed to China, given their greater exposures to discretionary categories,” Bernstein analysts led by Zhihan Ma said, according to an Investing.com report.
In 2019, just after Trump first imposed tariffs on China during his first term as president, Target, Dollar Tree, and Lowe's Companies Inc. (LOW) saw a 30-40 basis-point impact on gross margins.
Retailers have since diversified their sourcing. Target, for instance, now sources 30% of its private label discretionary products from China compared to 60% previously.
In recent months, several retailers have flagged potential risks to their business from the tariffs and said they were working with suppliers or moving sourcing elsewhere to keep prices in check.
Walmart reportedly asked some Chinese suppliers for major price reductions, essentially shouldering the full cost of Trump's duties.
Trump has announced tariffs on imports from Mexico, Canada, and China, and on the import of steel, aluminum, and cars.
The situation is developing as some of those tariffs have not yet kicked in, leaving room for Trump to reverse his stance even as affected nations could announce their reciprocal tariffs.
However, the markets have responded unfavorably. The S&P 500 is down 6.3% for the month, while the Dow Jones Industrial Average is poised for a 5.2% loss. The tech-heavy Nasdaq Composite has tanked 8.1%.
In the consumer space, the Consumer Staples Select Sector SPDR Fund (XLP), which tracks stocks of companies selling staples and household products, fell 2.7% this month.
Consumer Discretionary Select Sector SPDR Fund (XLY), which tracks companies that produce discretionary items, fell 8.5%.
Bernstein said U.S. retailers will see a limited impact from Canadian and Mexican import tariffs, as imports are concentrated mainly in commodities and industrial goods.
Walmart Inc. (WMT) and Costco Wholesale Corp. (COST) may have a sales exposure of about 1% and 3%, respectively, for freshly sourced goods from these countries.
In terms of immigration policy and mass deportation, there is limited risk, although labor supply might be tight.
Bernstein believes "retailers that pay employees poorly (e.g., DG, DLTR) are particularly exposed to future labor cost increases and high turnover," while Costco (COST) is best positioned.
On Stocktwits, the retail sentiment for both staple companies (XLP) and discretionary goods companies was in the 'bullish' territory.
A user posted a chart showing year-to-date gains in tech and discretionary stocks and signaled that this might be a good sign for the broader market.
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