SA Asks: Which retailers are best positioned for higher tariffs?

Seeking Alpha News (Mon, 07-Apr 4:30 PM)

Which retailers are best positioned to weather higher tariffs proposed by the Trump administration?

Seeking Alpha analysts Justin Purohit and Dividend and Value Investor gave us their thoughts. 

Justin Purohit: Most, if not all, retailers will be impacted by tariffs to some degree, whether through strategic operational planning efforts or through pricing actions. Many retailers are already carrying excess inventory from prior ordering cycles, and this should provide insulation against any immediate tariff impact.  

I believe that off-price retailers, however, such as the TJX Companies (NYSE:TJX), Ross Stores (NASDAQ:ROST) and Burlington (NYSE:BURL) are best positioned for the tariffs being considered. The prospects of higher prices elsewhere will likely continue drawing consumers to discounted merchandise. In my view, TJX (NYSE:TJX) with its superior operational sourcing model would be the most likely retailer able to continue offering competitive pricing to its shoppers. 

Dividend and Value Investor: When assessing which retailer is best positioned for tariffs, I look at three aspects: Profitability, product mix and supply chain concentration risks. I compared the five largest traditional retailers.

In terms of profitability, Costco (NASDAQ:COST) would appear to be the riskiest with its low to mid-teens gross margin, but the opposite is true as its operating cost structure is superbly lean, and its cash flow profitability is even higher than Walmart's (NYSE:WMT). Kroger (NYSE:KR) exhibits weaknesses, and while Target's (NYSE:TGT) profitability looks very solid, this is indicative of its somewhat different product mix. Home Depot's (NYSE:HD) profitability is inherently strong due to its focus on the home improvement sector.

With recession an increasingly likely secondary effect of tariffs, Home Depot's (NYSE:HD) product mix naturally makes it the retailer with the greatest (temporary) downside risk. Since Costco's (NASDAQ:COST) mix is more than two-thirds consumer staples, I consider it very well positioned, on par with Kroger (NYSE:KR) and Walmart (NYSE:WMT). Target's (NYSE:TGT) comparatively high reliance on discretionary products makes it relatively vulnerable to an economic downturn (<50% of sales are consumer staples).

Looking at foreign supply chain risks, Home Depot (HD) shines - with around 70% of cost of sales being associated with domestic sources. Costco (COST) and Kroger (KR) have the lowest risks related to foreign supply chains, in my view, with Walmart (WMT) thereafter, and Target (TGT) the weakest due to its significant apparel, accessories, electronics and home furnishing sales (almost half of 2024 sales).

All in all, I think Costco (COST) is best positioned, even if we also take into account tariff-related secondary effects - such as higher unemployment and a recession. Still, this does not make the stock a good investment, in my view. Being a contrarian by nature, I think the market is currently too negative on Target's (TGT) stock, while consumer staples-focused retailers continue to trade at pretty lofty valuations.