Cross Border Commerce

Tariff Battle May See Mounting Retail Casualties

U.S.-China Trade War

Trade wars leave casualties on the economic battlefield, wounding balance sheets and earnings as the costs to import (and sell) goods mounts. That’s especially true for retailers caught in the cross-hairs of the ongoing skirmish between China and the United States, where the latest (and forthcoming) round of tariffs is hitting some of the biggest U.S. players right in the margins.

Battles between nations are fought not just on the fields, in the air, on the seas.

They’re waged across balance sheets and income statements, too, with casualties mounting across corporate earnings and consumers’ pocketbooks and wallets.

It’s the coldest of cold wars — one that has an especially chilling effect on retail.

In recent weeks, amid earnings results, executives at larger retail companies took note of the impact, current and on the horizon, as the Trump administration has levied taxes on imports (because that is what tariffs are) from China.

Kohl’s showed some of the more marked impact, as shares dove double-digit percentages in the wake of a cut to earnings forecasts.  Part of the reason, according to management, can be traced to gross margin pressures.  Gross margins, of course, take in to account the cost of goods sold — and for many retailers, the costs rise as tariffs make imports more expensive.

Said Kohl’s CFO Bruce Besanko on the call with analysts after the latest quarter earnings came in several pennies lighter than expected: “Right now these tariffs primarily affect our China-sourced merchandise in our home and accessories business.  China is not our largest source of merchandise, but it is a big one. It’s a little over 20 percent of our goods.”

As he said later in the call, “In the guidance we’ve assumed that there would be an impact to the gross margin, which is in part why we’ve reduced the outlook for margin from what we previously had.  There are two components to that. One is this tariff increase.”

Kohl’s joins a pantheon of retail heavyweights warning of the ways the ongoing trade war with China will hurt results.  In another example, JCPenney said that tariffs may hurt sales across important lines of goods such as accessories or furnishings.  As Penney’s CEO Jill Soltau said on that company’s call, “Looking ahead, we do anticipate a more meaningful impact on both our private and national brands.”

In the meantime, the hits will keep on coming.  U.S. Treasury Secretary Steven Mnuchin said last Wednesday (May 22) that the United States is about a month away from imposing the latest round of tariffs on $300 billion in Chinese imports, an action that comes on top of the boost in existing tariffs that came in May on $200 billion in Chinese goods.  That rate was jacked up to 25 percent from 10 percent.  The looming tariffs on additional goods that are a month away may be as high as 25 percent.

The impact has been widespread, with ripple effects to any number of verticals.  The American Chamber of Commerce in China has said that more than 40 percent of 250 respondents to a survey are are looking to relocate or had relocated manufacturing facilities outside of China.  That survey came after the last round of tariffs, according to reports, and three quarters of respondents said the tariffs were having a negative impact on competitiveness.

For retailers, the tariffs have a double-edged sword.  For some of the biggest players in some cases, companies can turn to private label offerings — but increased costs are still in the picture, even if they shift away from imports.

Other verticals are seemingly squarely in the cross-hairs as casualties of the tariff skirmish.  The tariffs have led to coordinated efforts by retailers to illuminate what might happen if this continues to go on.  Earlier this month more than 170 shoe retailers, with Nike among them, said that 25 percent tariffs could cost shoe shoppers an additional $7 billion.   The letter noted that U.S. tariffs on all consumer goods average just 1.9 percent.  But for the shoe firms, they average 11.3 percent for footwear — and can be as high as 67.5 percent. Adding a 25 percent tax increase means some consumers would pay the equivalent of 100 percent in duty taxes. This comes as the U.S. imported $11.4 billion in footwear from China last year, per U.S. Census Bureau data.

It’s not just about clothes, of course, or footwear.  Home improvement giant Home Depot has said that, with the last round of increases (i.e. not accounting for the looming round coming in a few weeks) there is as much as a billion dollar impact to results.  Of course, that impact would worsen with the newest round — and it has not yet been contained in the latest earnings forecasts.

The growing alarm has led to direct conversations between the administration and the retailers themselves.

As reported, Treasury Secretary Mnuchin has said he spoke with Walmart chief financial officer Brett Biggs, and told a Congressional hearing with the House Financial Services Committee.  A representative had asked him about affordability of staples such as diapers amid escalating tariffs.

“I am monitoring this situation carefully,” Mnuchin told committee. “I was on the phone with the CFO of Walmart, which obviously is one of the biggest sellers of the items that [the lawmaker] described specifically. I understand from Walmart what things they can source from other areas and what items they can’t.”  Later he told reporters that the administration will look at granting exemptions from the tariffs on items that “impact certain consumers,” Mnuchin told reporters after the committee hearing. “We’re going to be very careful with this.”

Buckle up for a long and bumpy ride, of course, as Chinese President Xi Jinping has said that his country is on a “new Long March.”  There’s no specific nod to the trade war, but those comments seem aimed at the current back and forth of economic saber rattling.

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