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Investment Ideas Wall Street keeping close eye on retailers as increased U.S. tariffs are set to take effect

Shoppers look at appliances at a Home Depot store in New York in this file photo.

Lucas Jackson/Reuters

U.S. retailers will be front and centre on Wall Street next week as the United States imposes new tariffs on US$300-billion worth of Chinese imports, including clothing, televisions and jewellery.

The upcoming tariffs on Chinese goods will hit U.S. consumers more directly than duties already levied against US$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 Sunday, 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 per cent from an originally planned 10 per cent.

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Mr. 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 Mr. Trump announced the September tariffs, the SPDR S&P Retail ETF has slumped 6 per cent, while the broader S&P 500 has fallen 2 per cent.

The Sept. 1 tariffs include consumer electronics worth US$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 US$115-billion. That includes smartphones, laptops and video game consoles, directly hitting tech companies, including Apple Inc., Microsoft Corp. and HP Inc.

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, favouring 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. and Lowe’s Companies Inc. are best-positioned to weather the tariffs, relying on China for 10 per cent or less of their cost of goods sold, Mr. Fadem wrote.

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

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

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

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

Heavyweight retailers, including Walmart Inc., Costco Wholesale Corp., Target Corp. 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 per cent 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.

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Target has surged 26 per cent 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 Mr. Trump from more than 200 U.S. footwear companies, including Adidas and Foot Locker Inc., 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. slumped 15 per cent on Thursday after the apparel retailer cut its full-year sales forecast in anticipation of the new tariffs.

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