Ahead of the Tape: One Big Worry For Two Retailers -- WSJ
February 28 2017 - 3:02AM
Dow Jones News
By Steven Russolillo
Two retailers moving in different directions have at least one
thing in common: They are terrified of a border-adjusted tax.
Target Corp. and Best Buy Co., both set to report earnings this
week, are among a group of retailers that sent executives to meet
with President Donald Trump earlier this month, lobbying against
higher taxes on imports. They are likely to speak out against Mr.
Trump's plans in their respective analyst calls.
Retailers have plenty to lose should the Trump administration
act on its plans, mainly because many rely substantially on
imported wares. Mr. Trump, who is scheduled to speak before a joint
session of Congress on Tuesday, has said the plan would operate
like a tax on the trade deficit. It also could act as one on
retailers, though, forcing them to raise prices and lose some
customers.
That would make life even more difficult for Target. It warned
last month of weaker-than-expected profits and sales during its
holiday reporting period so its actual fourth-quarter results
Tuesday shouldn't contain too many surprises.
Same-store sales are expected to have dropped after two quarters
of growth. An estimated 30% rise in online sales wasn't enough to
offset continued declines at its brick-and-mortar locations.
Buckingham Research Group analyst John Zolidis warned Monday that
Target should consider closing stores, which would follow similar
moves from J.C. Penney Co. and Macy's Inc.
Target's stock has been under pressure, posting losses over
three, five and 10 years. And in the past 12 months, shares have
trailed the S&P 500 by 37 percentage points. At 12 times
projected earnings over the next 12 months, the multiple is cheap
but might get even cheaper if a border tax is put in place.
Best Buy, which reports Wednesday, would also feel the pain. The
company imports about two-thirds of its goods, with another 20%
being foreign-made from domestic suppliers. RBC estimates a border
tax would push Best Buy's overall tax bill to $3.8 billion from
$600 million. A Best Buy spokesperson confirmed that the company
has passed around a flyer to lawmakers with those projections.
That could derail a recent success story. Best Buy's operating
margins have been on the upswing for the past four years, making it
one of the few traditional brick-and-mortar retailers that have
thrived in an environment dominated by Amazon.com Inc. Fiscal
fourth-quarter same-store sales are estimated to have increased for
a third consecutive quarter and its shares have risen by 40% over
the past year. Best Buy shares fetch 13 times projected earnings,
roughly around its average over the past three years.
No matter how well or poorly retailers are doing, they have good
reason to fear Mr. Trump's plans.
(END) Dow Jones Newswires
February 28, 2017 02:47 ET (07:47 GMT)
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