Bernstein on Broadlines/Hardlines: 'Early Assessment of Tariff Impacts'

Bernstein analyst Zhihan Ma provides an early assessment of tariff impacts on the U.S. Retailing Broadlines & Hardlines sector.

The analyst commented: "President Trump announced sweeping tariffs on all countries at 10%, taking effect at 12:01am ET on April 5. Meanwhile, the US will impose reciprocal tariffs on countries including China (34%), Vietnam (46%), and the EU (20%), taking effect at 12:01am ET on April 9.

Within our coverage, DG is the least exposed to tariffs (with ~4% direct import exposure), followed by WMT and COST (each with ~1/3 of COGS imported, directly and indirectly). At the high end, TGT and DLTR are the most exposed (each with ~50% direct and indirect import exposure), followed by HD and LOW with ~40-50% exposure.

Among countries facing higher than 10% tariffs, retailers have the greatest exposure to China. We estimate that TGT and the DLTR banner have the highest exposure to Chinese imports, again given their greater exposures to discretionary categories. Looking back at the impact of the 2019 tariffs, TGT and DLTR each experienced ~30-40bps gross margin headwind (in impacted quarters). This time around, DLTR mitigated 90% of the impact of the first round of 10% Chinese tariffs but expect another ~20M a month incremental cost from an additional 10% tariff on goods from China and 25% on goods from Canada and Mexico (~140bps gross margin impact if not mitigated). Although many retailers have diversified away from China since 2019 and have been pushing back on suppliers to absorb the incremental cost, another 34% tariffs may simply be too much to absorb. Retailers’ diversification effort away from China could also be offset by higher tariffs on alternative sourcing countries.

Among other countries / markets, we see China, the EU, Vietnam, Japan, South Korea, India, and the UK as the most problematic, with the retailer merchandise categories of apparel, electronics, furniture, appliances, and alcoholic beverages most impacted.

Overall, all retailers are impacted by tariffs, but we see DG, WMT, and COST as the most insulated. DG’s low import exposure separates it from the pack, while WMT and COST also have less exposure than average and have greater bargaining power to push back on suppliers. Meanwhile, as tariffs drive prices up and squeeze consumers spending power, WMT and dollar stores are trade down beneficiaries. As investors look for safe havens in times of uncertainty, we believe that WMT, COST, and DG should make the list."

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