Wall Street Weekahead: Retailers in spotlight as tariffs on consumer products kick in

SAN FRANCISCO (Reuters) - U.S. retailers will be front and center on Wall Street next week as the United States imposes new tariffs on $300 billion worth of Chinese imports, including clothing, televisions and jewelry.

FILE PHOTO: People tour The Shops during the grand opening of The Hudson Yards development, a residential, commercial, and retail space on Manhattan's West side in New York City, New York, U.S., March 15, 2019. REUTERS/Brendan McDermid

The upcoming tariffs on Chinese goods will hit consumers more directly than duties already levied against $250 billion worth of imports. Retailers are scrambling to cut costs and find ways to minimize the damage to their bottom lines, while Wall Street analysts try to identify those best positioned to weather the taxes.

The U.S. government is set impose tariffs on the newest list of products starting Sept. 1, with tariffs on about half of those goods delayed until Dec. 15 in a bid to soften their impact on holiday shoppers. President Donald Trump last week upped the tariffs to 15% from an originally planned 10%.

Trump’s aggressive stance and often mixed signals in his trade war with China have taken a toll across Wall Street in recent weeks, especially on the shares of companies that rely heavily on the world’s second-largest economy.

Wall Street rallied on Thursday after China's commerce ministry said both sides were discussing the next round of talks. Still, since Aug. 1, when Trump announced the September tariffs, the SPDR S&P Retail ETF XRT.P has slumped 6%, while the broader S&P 500 .SPX has fallen 2%.

The Sept. 1 tariffs include consumer electronics worth $52 billion, including smart speakers, earbuds and televisions, according to the Consumer Technology Association, an industry group.

Tariffs kicking in on Dec. 15 include consumer electronics worth $115 billion. That includes smartphones, laptops and videogame consoles, directly hitting tech companies, including Apple Inc AAPL.O, Microsoft Corp MSFT.O and HP Inc HPQ.N.

Investors are looking for retailers most able to hold prices steady without hurting their margins, or increase prices without hurting demand for their products. They are also looking for companies that rely less on China for their wares.

“We’re leaning in on quality across our Hardline Retail universe, favoring retailers with scale, pricing power in respective categories, less elastic products, and a greater focus on (professional) influenced sales and initiatives,” Wells Fargo Securities analyst Zachary Fadem wrote in a report this week.

On that basis, Home Depot Inc HD.N and Lowe's Companies Inc LOW.N are best-positioned to weather the tariffs, relying on China for 10% or less of their cost of goods sold, Fadem wrote.

At the other extreme, Best Buy Co Inc BBY.N on Thursday gave a lower-than-expected full-year outlook, blaming tariffs and uncertainty about future consumer behavior, sending its stock down 8% and extending its loss to 17% in August.

Executives on Best Buy’s analyst call said about 60% of the consumer electronics retailer’s cost of goods sold comes from China, and that it was working on lowering that to 40% next year.

A basket of companies impacted by the trade war, created by Barclays, has fallen around 8% this month, underperforming the S&P 500. Barclays’ basket includes consumer-facing companies that it estimates receive over 40% of their sales from products imported from China, including Apple, Nike Inc NKE.N and Whirlpool Corp WHR.N.

Tariffs starting on Sept. 1 will affect $39 billion worth of footwear and clothing, with the December tariffs affecting another $12 billion worth of such products, according to the American Apparel & Footwear Association.

Heavyweight retailers, including Walmart Inc WMT.N, Costco Wholesale Corp COST.O, Target Corp TGT.N and Home Depot, can adjust their global supply chains and use their clout to force suppliers to accept smaller margins to offset the tariffs, giving them an advantage over smaller competitors.

Showing that investors are willing to buy retailers positioned to weather the trade war, Walmart has gained 7% since its quarterly report on Aug. 15, when it said it had raised the prices of some of its items due to tariffs but was not passing all the cost pressure it faces on to consumers.

Target has surged 26% since its Aug. 21 quarterly report, when it boosted its full-year profit outlook, even after accounting for potential additional tariffs.

A letter this week to Trump from over 200 U.S. footwear companies, including Adidas ADSGn.DE and Foot Locker Inc FL.N, warned that the upcoming tariffs would exacerbate economic uncertainty and could drive up prices in other countries that produce footwear, given limited production capacities.

Abercrombie & Fitch Co ANF.N slumped 15% on Thursday after the apparel retailer cut its full-year sales forecast in anticipation of the new tariffs.

Reporting by Noel Randewich in San Francisco; Editing by Alden Bentley and Dan Grebler