JPMorgan analysts say the cost of tariffs on Chinese goods could rise from the $600 it’s already imposing on U.S. households, buttressing the warnings from retailers like Walmart Inc. and Target Corp.
JPMorgan says tariffs that are already in place are also having an impact on company profits.
If the Trump administration imposes 25% tariffs on additional Chinese goods as well as tariffs on goods from Mexico, the impact on companies and families will be felt even more deeply. The move could cost U.S. households up to about $2,500 per year.
“We believe the next round of tariffs that the Trump administration is threatening – Mexico 5% and China Phase III – could substantially increase the risk of pushing the U.S. business and profit cycle into an outright contraction,” wrote JPMorgan analysts led by Dubravko Lakos-Bujas. JPMorgan calls tariffs a “form of regressive tax on small businesses and lower-income households,” with the latter likely to reduce discretionary spending in response to the rising rates.
“[B]ased on tariff cost estimates, we could see the average estimated annual cost per household increase from ~$600 to ~$1,550 with Phase III implementation, which would more than offset the benefits received from Tax Act estimated at ~$1,300,” the JPMorgan note said.
“The impact to households could rise further if tariffs on Mexico are implemented – a full 25% could increase the household cost by an additional ~$1,000 bringing the total impact to ~$2,500.”
Major retailers like Walmart WMT, +1.01% and Target TGT, +1.40% , who sell everything from food to clothes and household goods to millions of American shoppers, warned months ago about the impact of tariffs on American families.
Fast-forward to the most recent earnings results, and these retailers and others continue to keep a wary eye on the tariff progress and how it will affect the price of products on their store shelves.
“We’re monitoring the tariff discussions and are hopeful that an agreement can be reached,” said Walmart Chief Executive Doug McMillon in remarks from the first-quarter earnings report.
“Our goal is to always be the low-price leader, and we will actively manage pricing and margins as warranted with our customers and shareholders in mind. Our merchant teams have been focused on this for months and continue to execute appropriate mitigation strategies.”
Treasury Secretary Steven Mnuchin said in late May that he’d spoken with Brett Biggs, Walmart’s chief financial officer, about tariffs.
“As a guest-focused retailer, we’re concerned about tariffs because they lead to higher prices on everyday products for American families,” said Brian Cornell, chief executive of Target on the first-quarter earnings call, according to a FactSet transcript.
“Our team continues to monitor trade negotiations and develop contingency plans to help mitigate the impact of tariffs on our guests and on our business… And as you’ve seen in our recent results, the team’s been able to manage through last year’s tariffs with minimal impact and we have plans in place to mitigate the impact of additional tariffs already scheduled for next month.”
Costco COST, +1.85% addressed the impact to the cost of merchandise in its 10Q filing, blaming the “actions in various countries, particularly China and the U.S.” for uncertainty.
“The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs,” the filing said. “The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to potential cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.”
And it’s not just the giant retailers and brands that are grappling with the impact of tariffs, both now and into the future. Guess Inc.’s GES, -7.83% Chief Executive said on the late Thursday fiscal first-quarter earnings call that the company is taking a long list of actions, including shifting sourcing to other countries and taking cost-saving measures. Also, the company is “raising prices if the pricing still delivers the value in the product our customer is looking for,” according to a FactSet transcript.
He said further tariff increases would have a “meaningful” impact on Guess.
Guess stock is down 7.6% in Friday trading after reporting an earnings miss. The stock is down 30.3% for the year to date.
Walmart stock is has rallied 13.7% for 2019 so far, Target shares are up 31.5% and Costco has gained 25.2%. The Dow Jones Industrial Average DJIA, +1.21% is up 11.5% for the year so far.
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