Retailers Walmart (WMT 0.18%) and Target (TGT -1.29%) have significant exposure to China, which supplies 26% and 34%, respectively, of the products they offer (according to CNN, citing UBS). Given this, President Trump's threats to increase tariffs on imports from China might seem like a potential shakeup to the companies' earnings. But so far, neither retailer is feeling the pain, and grocery and online sales this holiday shopping season may continue to lift both companies.
The U.S. has hit China with tariffs on $550 billion worth of goods in a trade war that started more than a year ago, and China has retaliated with tariffs on $185 billion in U.S. products. If an agreement isn't reached, the Trump administration has threatened to increase tariffs further. While Walmart and Target are among the companies that have expressed concern over the situation in past months, neither retailer was focused on the issue as they reported third-quarter earnings.
Extra helpings of earnings success
Target's results last week surpassed estimates, and management lifted profit guidance for the year. As for Walmart, the company increased its annual profit forecast earlier this month as quarterly earnings also beat estimates, though sales fell short. Target shares are up 81% this year, with the stock trading at 20 times earnings, while Walmart shares have advanced 26% and trade at 24 times earnings.
So if these retail giants depend on China, how can they fare so well under the ongoing threats of tariff increases? The answer may be found on your plate. Grocery is an area of interest for both Target and Walmart, and it's a division that could protect the retailers from future tariff hikes on imports, because grocery products are sourced closer to home.
Target's 2018 annual report showed that its $74.4 billion in sales were pretty evenly spread across its five product groups (of which "food and beverage" is one), each at about 20%. This fall, Target launched a new grocery brand called "Good & Gather" to strengthen its presence in the food market. By the end of next year, the line will include more than 2,000 products. Target hasn't specified how much it would like grocery to contribute to sales as the new brand grows.
Food drives Walmart's online growth
When it comes to grocery, Walmart is already a powerhouse. Grocery accounts for about 55% of the company's U.S. sales, according to Statista. In fact, food is such a strong driver for the company's online business that chief executive officer Doug McMillon in the third-quarter statement said Walmart.com now should make similar progress with its general merchandise. Walmart customers can do their grocery shopping online, and Walmart offers unlimited delivery for $98 a year or $12.95 a month.
E-commerce is another area where Target and Walmart can succeed this holiday season regardless of the tariff situation. About two-thirds of U.S. shoppers plan to peruse online retailers during the holiday shopping season, according to a report by Deloitte. Online sales are expected to grow by 14% to 18%, to as high as $149 billion.
Target and Walmart have already made gains. Target's digital sales jumped 31% in the third quarter, and its same-day delivery and pickup options accounted for 80% of that growth. Chief executive officer Brian Cornell told CNBC that when customers order online and Target can prepare the order within one of its stores rather than shipping from a distribution center, about 40% of the cost is eliminated. When online customers opt for Target's same-day delivery or pickup options, the cost is reduced about 90%, he added. Walmart said third-quarter e-commerce sales surged 41%, led by ... guess what? Growth in online grocery shopping.
Since Thanksgiving falls on Nov. 28 this year, the holiday shopping season is shorter than usual by six days. This leaves companies with a smaller window of opportunity for holiday sales than in the past. And, as always, they face online giant Amazon, which plays in both the food and general-merchandise spaces. Walmart is already competing against Amazon in the area of grocery delivery, with Amazon recently announcing free delivery to some Prime members.
In spite of the challenges, Target and Walmart are heading into the holiday shopping season with confidence. Management at Walmart said it kicked off the holidays online with lower prices on items from electronics to toys, and Target announced its biggest Black Friday event ever. The threat of rising tariffs on imports from China exists, and it is something these retailers of consumer staples can't control. But both Target and Walmart have demonstrated that they can compensate through other aspects of their businesses that they can control -- over the holidays and beyond.