Sweeping new tariffs announced by US president Donald Trump are set to create significant challenges for the hardlines retail sector, adding complexity to supply chains, pricing strategies, and consumer demand, analysts at UBS have warned.
While some retailers are better positioned to navigate these disruptions, the broad-based nature of these tariffs is expected to weigh on the sector as a whole.
“Despite some of the uncertainty being removed, we think tariffs will make it more complex for many retailers to navigate through this backdrop, especially if tariffs are here to stay,” analysts wrote, noting Trump’s announcement was “worse than generally expected.”
Rising prices
The tariffs, which take effect in early April, impose higher import duties on a range of products from key trading partners, including Japan, Vietnam, South Korea, and India.
Unlike the 2018 to 2019 tariff round, which largely affected Chinese imports, the broader scope of this policy leaves retailers with fewer options to shift production and sourcing, UBS believes.
“Since this includes countries such as Japan, Vietnam, South Korea and India, which are significant exporters to the US, retailers likely have to rely on strategies beyond sourcing diversification in order to navigate this backdrop,” analysts wrote.
Many will be forced to adjust product specifications and pass costs onto consumers through price increases.
The analysts believe that retailers with significant exposure to low-cost imports, such as Five Below (NASDAQ:FIVE) and Dollar Tree, Inc. (NASDAQ:DLTR) will likely be among the most affected.
These companies, which rely on affordable goods to maintain their value proposition, may have to lean more heavily on pricing adjustments than initially expected.
Meanwhile, larger-scale retailers like Walmart Inc (NYSE:WMT, ETR:WMT) and Costco Wholesale Corporation (NASDAQ:COST, ETR:CTO), as well as those with stronger pricing power, such as Autozone Inc (NYSE:AZO) and O'Reilly Automotive Inc (NASDAQ:ORLY), are expected to fare better due to their ability to negotiate with suppliers and leverage supply chain efficiencies.
Delayed price increases
The analysts expect price changes to become visible in the coming one to three months. Price increases will likely depend on consumer demand elasticity, they added.
“We think many retailers will take a test and learn approach, as this new tariff backdrop presents uncharted territory. In that light, products or categories that are more needs-based in nature will likely see less elastic unit demand trends.”
Essential goods, including food, household supplies, and auto parts, are expected to maintain steadier demand, while discretionary categories and big-ticket items could see a slowdown.
This dynamic could further accelerate inflation, impacting real wages and consumer purchasing power.
Earnings outlook
Retailers will need to employ a combination of strategies to mitigate the impact of tariffs, UBS noted.
Those with larger scale will have greater leverage in negotiating with suppliers, while retailers that can swiftly adjust their product assortments will be better equipped to adapt to cost fluctuations
The analysts believe retailers with the most resilient earnings outlook include the most resilient earnings Walmart, Costco, BJ's Wholesale Club (NYSE:BJ), AutoZone, O'Reilly, Kroger Co (NYSE:KR, ETR:KOG), Albertsons, Dollar General, and Sprouts Farmers Market.
“We think the retailers that have a greater amount of exposure to consumables products will see more earnings resiliency, especially grocers, given the vast majority of these products are sourced domestically,” they wrote.
“This, combined with their vast scale, should allow retailers like Walmart and Costco to better manage the impact of tariffs. Plus, these retailers will likely be able to widen their price gaps with their competitors within categories hit by tariffs.”
Separately, they believe players in the auto parts retail sector will benefit from selling needs-based items and their greater scale.
“Ultimately, the longer that the tariffs persist, the more likely it is to drive further consolidation in retail,” analysts concluded.