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Tariffs Cast a Pall Over Retail: 5 Stocks on Alert

Rajani Lohia

The prolonged U.S.-China trade tiff has disrupted global supply chain arrangements, largely affecting imports and exports. The war erupted in 2018, with the Trump Administration slamming tariffs on $250 billion worth of Chinese products and China retaliating with tariffs on $110 billion U.S. goods.

Tariffs Take a Toll on Retail

Though the initial round of tariffs was not much of a threat to the U.S. Retail industry, the announcement for the imposition of the fourth tranche of 10% tariffs on an additional $300 billion worth of goods from China (termed as List 4 goods) on Aug 1, 2019 dealt a huge blow. The List 4 tariffs sparked concerns for the retail sector as the merchandise involved were mainly clothes, sporting goods and footwear — which are the prime offerings of retailers.

This was followed by Trump’s proposal of lifting the initial List 1, 2 and 3 tariffs from 25% to 30%, which will now go into effect on Oct 15 (previously Oct 1). Simultaneously, Trump raised the previously announced tariffs on List 4 (classified as 4a and 4b) goods from 10% to 15%, with 4a tariffs effective since Sep 1 and 4b tariffs slated to go into effect on Dec 15.

How Retailers Are Keeping Afloat

While retailers had managed to mitigate much of the impact of the initial tariffs, the latest round of impositions is likely to make everyday goods, ranging from clothing, toys, home supplies, and electronics to footwear, expensive for American consumers. This is clear from the warning by most retailers, including the likes of Walmart WMT, Target TGT, Best Buy BBY and Home Depot HD, of further price hikes.

Moreover, retailers are working on striking deals to obtain products from different countries and suppliers, eliminating the need to import from China. Notably, apparel retailers are shifting to production hubs like Vietnam, Cambodia, Turkey and Bangladesh for basic apparel items. However, China remains the manufacturing hub for high-end merchandise like coats and accessories. Further, retailers may bridge the gap of short supplies by sourcing from Mexico, which manufactures jeans for U.S. consumption. Abercrombie & Fitch ANF expects merchandise imports from China in the current fiscal year to be less than 20%, down from 25% in fiscal 2018.

As a last resort, retailers might start restructuring by lowering headcount and closing stores to offset the tariff woes.

5 Retail Stocks in Focus

In the most recent positive development, China has exempted some U.S. goods from tariffs, which made the Trump administration delay planned tariff increases on some Chinese imports, as mentioned above.

However, retailers’ apprehensions due to the potential increases in tariffs for List 1, 2, 3 goods as well as the inclusion of List 4 items are intact. That said, we discuss five retailers that have lowered outlooks for the current year based on assumptions of a prevailing tough tariff environment.

Going into the second half of fiscal 2019, Ross Stores Inc. ROST — an off-price retailer of apparel and home accessories — anticipates that the recent announcement of 10% tariff on goods imported from China, including apparel and footwear, will mar results. It expects tariff-related headwinds and higher expenses to hurt margins. The company slashed the fiscal 2019 earnings view.

Fiscal 2019 earnings per share are expected in the range of $4.41-$4.50, compared with $4.38-$4.52 projected earlier. The Zacks Consensus Estimate for its current-year earnings has declined by a cent in the past 30 days. Ross Stores currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar Tree Inc. DLTR, an operator of discount variety stores, also expects the aforementioned tariffs on List 4 goods and additional 5% imposition on List 1, 2, and 3 goods, to hurt top line. It expects these tariffs to result in an additional $26 million costs in fiscal 2019. Management narrowed its sales view and now expects the metric in the range of $23.57-$23.79 billion compared with the prior $23.51-$23.81 billion. Dollar Tree carries a Zacks Rank #3. The Zacks Consensus Estimate for its current-year earnings has moved down nearly 1% in the past 30 days.

Abercrombie & Fitch Company, a specialty retailer of premium, high-quality casual apparel apprehends impact of List 3 and List 4 tariffs on near-term results. These tariffs are likely to have an adverse impact of about $6 million on its cost of goods sold and gross profit in the current fiscal year. For fiscal 2019, this Zacks Rank #3 company expects gross margin to decline 50-90 basis points (bps), with combined currency and tariff-related impacts of 60 bps. Further a gross margin decline of 100 bps in the fiscal third quarter is likely to stem from a 90-bp from currency and tariffs. The Zacks Consensus Estimate for its current-year earnings has declined about 15.7% in the past 30 days.

Home Depot Inc. HD, the world’s largest home improvement retailer, is also not exempt from the impacts of tariffs. Owing to deflation in lumber prices and the potential impact of the newly-announced tariffs on U.S. consumers, this Zacks Rank #3 company lowered its sales growth guidance for fiscal 2019. The company now expects sales to increase roughly 2.3% compared with 3.3% estimated earlier.

Macy’s Inc. M, one of the leading department store retailers, made selective price increases to combat the tariff impact, which did not go well with consumers, leading to soft performance in recent quarters. Further, the company is actively working with its vendor partners and suppliers in China to alleviate the impact of tariff. Though this Zacks Rank #5 (Strong Sell) company has not factored the impact of the fourth tranche of tariffs on goods from China in its earnings per share guidance, its fiscal 2019 view is bleak. It anticipates fiscal 2019 net sales to be roughly flat. Adjusted earnings per share are anticipated to be $2.85-$3.05, down from the prior view of $3.05-$3.25. The company had reported earnings of $4.18 in fiscal 2018.

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