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Trump's New Tariffs Will Hurt These 3 Retailers

By Leo Sun - Updated Sep 27, 2018 at 1:07PM

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$200 billion in new tariffs on Chinese goods will create big headaches for Walmart, Target, and JCPenney.

New U.S. tariffs on $200 billion in Chinese products went into effect on Sept. 24, marking the Trump Administration's most aggressive move in the trade war so far. A 10% tariff will immediately go into effect, and it will rise to 25% at the end of the year.

This escalation follows the first round of tariffs on $34 billion worth of Chinese goods in July, followed by tariffs on another $16 billion of goods in August. China struck back with retaliatory tariffs all three times, refusing to make any concessions.

Two boxing gloves with the American and Chinese flags.

Image source: Getty Images.

American retailers who import large quantities of Chinese goods could be hit by higher prices, slowing sales, and declining margins. The National Retail Federation's Matthew Shay recently said, "It's disappointing that, despite the voices of those impacted, the administration continues to advance harmful tariff policies that threaten to weaken the US economy." Shay also warned that the retail sector couldn't "afford further escalation, especially with the holiday shopping season right around the corner."

Walmart (WMT 1.85%), Target (TGT 1.70%), and JCPenney (JCPN.Q) all recently warned that these new tariffs will hurt their businesses. Let's take a closer look at how Trump's tariffs could hurt these three companies, and whether or not investors should avoid their stocks until the smoke clears.

Walmart

Walmart has stated that two-thirds of its products are sourced, grown, or assembled in the US. However, many of those products' components still come from China. For example, fans produced in Texas and Tennessee still use motors from China.

To counter those headwinds, Walmart is employing "mitigation strategies," which include stockpiling products before the tariffs take effect and discussing alternative plans with suppliers. But in a recent statement, Walmart warned that its prices for certain products (including car seats, cribs, backpacks, hats, pet products, and bicycles) could still rise as much as 25%, which would place "a serious burden" on its lower-income shoppers.

Walmart warned that "either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether." It also highlighted the difficulties of finding alternative suppliers due to various safety and labor concerns in less developed markets. Walmart also operates over 400 stores in China, which means that Chinese tariffs against US products will also hurt its sales across the country.

Walmart CEO Doug McMillon with JD.com CEO Richard Liu.

Walmart CEO Doug McMillon with JD.com CEO Richard Liu. Image source: Walmart.

Target

Target's Chief Merchandising Officer Mark Tritton recently stated that the retailer was "deeply troubled by and strongly oppose[d]" tariffs, and stated that the higher duties would "penalize American families." Tritton also warned that the tariffs could make basic family necessities like cribs and infant car seats more expensive, and even raise the costs of sending children to college with pricier desks, bookshelves, and other dorm room products.

Target faces the same sourcing issues as Walmart, but it doesn't operate any stores in China. However, its main overseas market is India, which President Trump also hit with steel and aluminum tariffs. India recently retaliated with tariffs on American food imports like almonds, chickpeas, and chocolate -- which could raise food prices at Target's Indian stores.

Target and Walmart are both aggressively revamping their stores and expanding their e-commerce and delivery ecosystems to counter Amazon (AMZN 2.07%). Those efforts have significantly reduced their operating margins over the past five years -- and higher tariffs could cause even more pain.

WMT Operating Margin (TTM) Chart

WMT Operating Margin (TTM) data by YCharts

JCPenney

JCPenney has already lost 95% of its market value over the past decade as it was crushed by sluggish mall traffic, the growth of Amazon and other e-tailers, and competition from superstores like Walmart and Target. A series of disastrous management decisions under former CEO Ron Johnson, who held the position from 2011 to 2013, exacerbated that decline.

JCPenney's outlook became even bleaker earlier this year when CEO Marvin Ellison abruptly resigned. At the time, Ellison had been trying to turn around the retailer by expanding into home goods, cosmetics, and store-in-stores for specialty apparel. It was also aggressively expanding its e-commerce ecosystem.

JCPenney recently co-signed a letter with nearly two dozen other retailers, including Walmart and Target, to protest Trump's tariffs. That letter warned that the tariffs would "punish American working families with higher prices on household basics like clothing, shoes, electronics, and home goods."

Unfortunately, JCPenney is in a much more precarious position than Walmart or Target. Analysts expect JCPenney's revenue to drop 2% this year, and for it to report a full-year loss. Walmart and Target are both expected to generate positive revenue and earnings growth this year.

Avoid this blast zone until the smoke clears

Walmart and Target are still decent long-term investments, but the new tariffs will likely cause their sales to decelerate while weighing down their gross margins.

JCPenney's business was already sputtering out, and the new tariffs could cripple its ability to counter Amazon, Walmart, and Target. It's smarter for investors to avoid these stocks until we can properly assess the damage after the holiday quarter.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$132.22 (1.85%) $2.40
Target Corporation Stock Quote
Target Corporation
TGT
$172.48 (1.70%) $2.88
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.55 (2.07%) $2.91

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