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Dark Clouds Gather Over U.S. Retailers Ahead of Earnings Season

Matthew Boyle
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Dark Clouds Gather Over U.S. Retailers Ahead of Earnings Season

(Bloomberg) -- Most automakers and tech companies have wrapped up first-quarter earnings, but U.S. retail’s bellwether reports still lie ahead. Wall Street will learn between now and Memorial Day whether the mixed Christmas period was just a blip, or if darker days may be ahead for consumer spending.

The world’s biggest retailer, Walmart Inc., releases its results next week, as does Macy’s Inc., the first of the major department stores to report each cycle. The following week, we get the home-improvement stores (Home Depot Inc. and Lowe’s Cos.), big-box stores Target Corp. and Best Buy Co., and apparel mainstays Kohl’s Corp., J.C. Penney Co. and Nordstrom Inc., to name a few.

There are already some worrying signs: Among 18 services industries surveyed, retail is the only one projecting sales will fall this year, an Institute for Supply Management report shows. The U.S. Department of Commerce releases its April retail sales figures on Wednesday, and they’re expected to show a slower gain than March. The National Retail Federation already forecast in February that sales growth will slow in 2019, especially as the benefits of tax cuts fade and the trade war with China threatens to erode Americans’ appetite for shopping.

Here are some of the things we’re watching for with retail earnings in the weeks ahead:

Talk of Tariffs

Major retailers account for close to 20% of U.S. imports from China, and with President Trump’s administration raising tariffs on some $200 billion in Chinese goods to 25% on Friday, it could completely wipe out earnings growth across the sector, according to Evercore ISI. Higher tariffs won’t play into first-quarter results, but investors will be watching for signals on retailers’ ability to raise prices or shift manufacturing to other regions.

That ability varies widely by category: home improvement and auto-supply retailers have more pricing power than, say, fast-fashion sellers. Moving production out of China also isn’t easy. Take bicycles -- Walmart has said that there are not enough U.S. producers to meet demand for the inexpensive models it carries, and shifting production outside China would actually be more expensive for the retailer than absorbing the 25% tariff. Even if new factories were found, most of the individual parts would still come from China, the retailer said in a September letter to U.S. Trade Representative Robert Lighthizer.

The retailers most exposed to higher Chinese tariffs include Best Buy, since many electronics are sourced in China with long lead times and few other options; Target, due to the increasing number of private-brand goods made abroad; and Bed Bath & Beyond Inc. and other sellers of home goods with minimal ability to boost prices. Generally speaking, the more food a retailer sells, the more insulated it is, but that doesn’t mean big grocers like Walmart and Kroger Co. are totally immune.

“Tariffs remain a wild card,” said Poonam Goyal, an analyst at Bloomberg Intelligence, especially as apparel is not on the current tariff list but could be subject to additional taxes if the trade spat escalates.

Other Rising Costs

Tariffs aside, retailers are already grappling with rising costs for transportation and labor. They’re also spending heavily to battle Amazon.com Inc. and serve their growing number of online orders, on things like same-day delivery and more automated warehouses.

Target will boost its starting wage to $13 an hour in June and has pledged to get to $15 next year, while Walmart and Costco Wholesale Corp. have also improved pay and benefits. The problem is that there are fewer obvious costs left to cut to offset these additional expenses, so retailers are starting to trim muscle, not fat, in order to preserve profit margins.

Weather Effect

We may scoff when retailers blame the weather for bad performance, but it does play a factor when conditions are far outside seasonal norms. Recall that in last year’s first quarter, Walmart said an unexpectedly wet April hurt sales of summer apparel, sporting goods and swimsuits.

In the quarter just ended, February in the U.S. was the coldest in nine years and the second wettest in 125 years, according to Telsey Advisory Group. Things improved by April, but analysts say it might not be enough to offset the unpleasant earlier weeks in the quarter. Also, look for retailers to say that the second quarter is also off to a bad start weather-wise, as this month is trending colder so far and companies are lapping the warmest May on record in 2018. A later Easter may have also pushed some sales out of the first quarter and into the second, depending on when retailers set their calendars.

While bad weather won’t keep people out of Walmart and Kroger due to their reliance on food sales, it has likely hurt results at department stores like Kohl’s, Macy’s, J.C. Penney and Nordstrom, which rely more heavily on seasonal apparel. Department-store sales dropped 11% in March and 3.6% in April, according to First Data. Flooding in the Midwest since mid-March, meanwhile, could support results at home-improvement retailers, even as it may have kept discretionary spending at bay.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Anne Riley Moffat, Cecile Daurat

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