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Retailers are doing well but fear tariffs’ impact

Author: Washington Examiner - September 12, 2018 - Updated: September 27, 2018

Zainab Alhemaid, right, tries a new coconut flavored soap at Lush store on Black Friday, Nov. 24, 2017 at Cherry Creek Shopping Center in Denver. (AP Photo/ Tatiana Flowers)

By Joe Williams, Washington Examiner

The U.S. retail industry is flourishing, a rebuke to critics who just a few years ago predicted its demise, but looming threats such as President Donald Trump’s trade skirmishes may weigh on profits in 2019.

At least 25 of the top publicly-traded stores reported revenue growth for the most recent earnings period, according to a Washington Examiner review of the disclosures. Several, like footwear company DSW Inc., posted double-digit gains.

Their success comes amid an economic boom — spurring low unemployment, high consumer sentiment and a slight increase in wages — that may be dampened by interest-rate increases from the Federal Reserve as well as Trump’s levies on overseas imports and retaliation from trading partners.

Retailers — including big-box chains Walmart Inc. and Target Corp., along with King Soopers parent Kroger Co. — are among Colorado’s biggest private employers.

The White House has talked of more tariffs on Chinese shipments including finished goods, a significant blow that several retail leaders say they are preparing for.

Wednesday, the Wall Street Journal reported that the Trump administration had reached out to China for further trade talks that might avert more tariffs, but the threat still looms.

“We’re concerned about tariffs because they would increase prices on everyday products for American families,” Brian Cornell, Target’s chief executive officer, said on the big-box retail company’s recent earnings call.

A top executive at Home Depot, meanwhile, told the Atlanta Journal-Constitution that the building-supply chain expects the new tariffs to add nearly $300 million in expenses in 2018.

At Dollar Tree Inc., which is renovating 500 of its Family Dollar stores, Chief Executive Officer Gray Philbin is prepared to grapple with the levies as needed. That may well mean raising prices, he noted.

“We are, and will be, active in the process,” Philbin said. “We will not stand still. Like other shocks to the system, we will do what we have always done to mitigate impact.”

Overall, however, investors and top executives are optimistic that the U.S. economy can weather the tariff headwinds as the lucrative holiday shopping season approaches.

Traffic at Target grew 6.4 percent in the three months through June, the most since it began reporting such data in 2008, and sales climbed 7 percent to nearly $18 billion.

Helping to support those gains were the Minneapolis-based company’s investments in online shopping and new offerings like curbside pickup, both of which hone a competitive edge against e-commerce giant Inc.

Amazon, founded by Jeff Bezos, topped $1 trillion in market value earlier this month, and its success has revolutionized the retail sector, forcing many companies to emulate its most successful tactics.

Amazon has opened several distribution centers in Colorado in recent years, and metro Denver is one of 20 finalists for the Seattle-based company’s $5 billion second headquarters complex, known as Amazon HQ2.

The real challenge for bricks-and-mortar retailers is capitalizing on the ways in which they differ from Amazon.

“It’s not so much the ‘compete with,’ you have to be able to ‘differentiate from’ and be able to drive that,” Peter Feldman, senior managing director at the Telsey Advisory Group, told the Washington Examiner. “It’s where you have a lot of overlap, where it’s easy to buy basic apparel or it’s easy to buy commodity-oriented goods, that’s where you’ve seen the most pressure in the retail space relative to Amazon.”

The home-improvement sector, by contrast, is one that has performed well against Amazon.

Sales at Home Depot, for example, rose 8.4 percent in the most recent quarter to $30.4 billion. The Atlanta- based retailer saw a 26 percent increase in online sales after investments in its delivery capabilities and in-store pickup options.

Other retailers are responding to the e-commerce threat by revamping their brick-and-mortar stores to lure shoppers.

Tiffany & Co. is investing more than $250 million in its Fifth Avenue store in New York, the location made famous by the Audrey Hepburn film “Breakfast at Tiffany’s.” Worldwide sales at the jeweler grew 12 percent to $1.1 billion in the three months through June.

Specialty stores like Best Buy are also seeing a resurgence. The consumer electronics giant reduced prices and bolstered its service offerings to better compete against Amazon, a gamble that appears to be paying off .

The company posted a 5 percent increase in revenue to $9.4 billion in the most recent quarter, while same-store sales, a key metric of success in the industry, grew by 6.2 percent.

Some of the gains, particularly at apparel stores, are due to higher prices, made possible by the strong economy coupled with supply-chain improvements.

But those hikes could be short lived as discount retailers like TJ Maxx look to unload ballooning inventory, according to Nomura Instinet analyst Simeon Siegel. Tariffs would further complicate the picture.

“Anytime a retailer or brand is faced with increased prices, the main question becomes how much they can pass on to consumers,” Siegel said in an interview. “Right now, everyone can raise prices. If you’re in a healthy environment, you’re able to raise prices. If the tariff s add costs, it’s a neutralizing factor.”

Colorado Politics contributed to this story.

Washington Examiner

Washington Examiner