By Michael Wursthorn
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 14, 2019).
Shares of retailers, buffeted by rising trade tensions in recent
sessions, face a key test this week when Macy's Inc., Walmart Inc.
and others begin reporting quarterly earnings.
The S&P 500 Retailing index fell another 3.2% Monday,
extending last week's 3% slide after President Trump pushed ahead
with tariff increases on billions of dollars of Chinese imports.
That outpaced the broader S&P 500's 2.4% decline Monday, as
shares of Macy's, J.C. Penney Co., Best Buy Co. and Ralph Lauren
Corp. all fell more than 3%.
The slides could worsen later this week once retailers begin
reporting earnings, analysts said. Investors will want details on
how merchants plan to absorb 25% tariffs on more than $40 billion
of goods that are imported from China and directly purchased by
U.S. consumers. Macy's and Walmart are among the first to release
results, with reports due Wednesday and Thursday, respectively.
The tariffs, which took effect Friday, hit clothing, luggage,
handbags and furniture, among other consumer products. And
retailers have few options: They can absorb the added costs
themselves, spread them across their vendors or pass them on to
customers.
None of those options is particularly attractive, analysts said,
and retailers' pain could signal broader implications for the U.S.
economy. Initial estimates project the additional tariffs will
shave 0.3% from U.S. growth this year.
"When this tariff conversation started last year, retailers were
in a stronger position," said Simeon Siegel, a senior retail
analyst at Instinet. At the time, economic conditions were better
and retailers were cutting back on inventories. "But now, things
have normalized, inventories are up again and retailers can't
really raise prices," Mr. Siegel said.
Profit margins are already under pressure, as companies such as
Walmart and Target Corp. have been spending heavily on upgrading
their digital capabilities and remodeling their stores. Absorbing
higher tariff-related costs would further stifle margin expansion,
analysts said.
In the previous earnings-reporting season, both companies
reported slimmer profit margins, but results were upbeat overall,
helping to send their shares higher. Walmart's stock remains up
7.2% this year, while shares of Target have added 8.5%.
Consumer-discretionary stocks, excluding internet retailers, are
expected to log a 5.2% contraction in first-quarter profit margins
from a year earlier, according to data compiled by Credit Suisse.
Margins among consumer-staples companies, which include Walmart,
are expected to shrink 5.8%.
That could lead retailers to raise prices in an effort to
protect their margins, analysts said, but companies run the risk of
stifling revenue if customers pull back on spending. Consumers'
pockets appear relatively healthy thanks to a tight labor market
and rising wages. But retail spending has been mixed in recent
months following a weak holiday sales season, a sluggish February
and a rebound in March, according to Commerce Department data.
With a 25% tariff on apparel items, retailers would have to
raise prices by 2.3% to maintain their gross margins, according to
analysts at Bank of America. If they can't raise prices, analysts
say the tariffs could compress retail earnings by 39% this
year.
Some companies have been trying to insulate themselves from the
U.S. and China trade spat, which could soften the blow of tariffs,
analysts said. Several companies have been shifting production from
China to other Southeast Asian countries in recent years. Others
had been rushing goods over from China, ahead of the tariffs,
Credit Suisse's retail analysts wrote in a note recently.
Even if the fallout isn't as bad as expected, the market has
reacted harshly to the idea of tariffs. Last year's volatility was
spurred, in part, by President Trump's protectionist policies. And
the S&P 500's 2.2% slide last week -- its biggest weekly loss
of the year -- came after President Trump's initial threat to raise
the levies on Chinese imports.
The S&P 500 took another leg down Monday after China
retaliated Monday by raising tariffs on about $60 billion of U.S.
goods, falling 2.4% for its biggest daily decline since Jan. 3. As
long as tariffs remain in place, investors' doubts alone could be
enough to drag retail-stock prices even lower.
"The fear of global trade...deteriorating amid macro fears
during previous U.S./China escalations" had the biggest impact on
stocks over the past six months, Credit Suisse analysts said, even
though costs didn't drastically increase.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
May 14, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Target (NYSE:TGT)
Historical Stock Chart
From Aug 2024 to Sep 2024
Target (NYSE:TGT)
Historical Stock Chart
From Sep 2023 to Sep 2024