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Retail Sector Braces for Tariffs, Amid Slowing Sales Growth for Some Retailers

Earnings, expectations for global growth, buybacks help, but CFOs turn more cautious.

Weaker-than-expected sales at a handful of retailers during the past three months come just as the sector is set to enter a period of uncertainty with higher import tariffs on Chinese goods potentially impacting sales and margins for the rest of the year.

Tuesday, Kohl’s Corp. reported 1 a 3.4% decline in comparable sales, or same-store sales, for the three-month period through May 4. The company also reduced earnings guidance for the rest of the year. J.C. Penney Co.’s 2 comparable sales fell 5.5% for the quarter ended May 4, partly the result of the retailer exiting the major appliance and in-store furniture categories.

Home-improvement retailer Home Depot Inc. 3 reported a weaker-than-expected 2.5% rise in comparable store sales for its first quarter. The company did reaffirm its sales and earnings guidance for the year, however. For its part, Target Corp. 4 was able to report first-quarter sales and earnings that beat expectations and maintained its outlook for the rest of the year, despite the potential impact of tariffs.

Earlier this month, the U.S. upped tariffs on $200 billion of Chinese imported goods to 25% from 10% previously. Since many consumer goods and products that make up those goods are sourced from China, retailers will look to cut costs elsewhere in a bid not to pass on higher prices to consumers, while also protecting their margins.

Consumer goods are estimated to be about 20% of the $200 billion in Chinese products with the added 25% tariff rate. And companies that rely heavily on imports from China as a percentage of their costs will be particularly vulnerable. The severity of the potential effect of the tariffs will depend on companies’ ability to pass on increased costs to consumers or to source replacements from alternative suppliers at a cost equivalent to what they’re now paying, says Moody’s Investors Service.

Companies, Moody’s says, “will find it harder to absorb the 25% tariff rate compared with the 10% rate, especially given the appreciation of the US dollar.” The tariffs are seen as being “credit negative” for retailers and wholesalers focused on home goods, electronics, hardware and appliances, for example.

In terms of stock prices, this month hasn’t been a good one for the retail sector even though recent reports show that consumer confidence remains high. The S&P 500 Retail Select Industry Index is down by 5.88% through May 21.

On the flip side, retailers would appear to have had some headwinds at their back given that the University of Michigan’s Index of Consumer Sentiment jumped 5.3% in its early May reading compared to the previous month. While the index’s 102.4 reading represented a 15-year high, the survey was taken mostly before the trade negotiations with China collapsed. 6

Richard Curtin, chief economist, said negative references to tariffs that peaked last July corresponded then to a significant decline in consumers’ expectations.

“Even apart from the direct impact of tariffs on prices, rising tariffs could cause a more general loss of confidence which could further diminish the pace of consumer spending,” he said. “At present, the data point toward moderate spending growth in the year ahead. Nonetheless, the data indicate the corrosive impact of an escalating trade war.”

 

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Sources:

1- Kohl’s Corp. (2019, May 21). Kohl’s Corporation Reports Financial Results [Press Release]. Retrieved from: https://corporate.kohls.com/news/archive-/2019/may/kohl-s-corporation-reports-financial-results

2- J.C. Penney Co. (2019, May 21). JCPenney Reports First Quarter 2019 Financial Results [Press Release]. Retrieved from: https://ir.jcpenney.com/news-events/press-releases/detail/578/jcpenney-reports-first-quarter-2019-financial-results

3- The Home Depot Inc. (2019, May 21). The Home Depot Announces First Quarter Results; Reaffirms Fiscal Year 2019 Guidance [Press Release]. Retrieved from: https://ir.homedepot.com/news-releases/2019/05-21-2019-110118554

4- Target Corp. (2019, May 22). Target Reports First Quarter 2019 Earnings [Press Release]. Retrieved from: https://investors.target.com/news-releases/news-release-details/target-reports-first-quarter-2019-earnings

5- Moody’s Investors Service (2019, May 10). Escalation of US tariffs will undermine stabilization of financing conditions and economy. Sector Comment. Retrieved from: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1171650

6- University of Michigan. (2019, May). Surveys of Consumers: Preliminary Results for May 2019. Retrieved from: https://www.sca.isr.umich.edu/

7- S&P 500 Retail Select Industry Index

8- https://www.marketwatch.com/investing/index/spsire?countrycode=xx

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