Bonus Episode for June 2. President Trump’s tariffs plans pose an enormous challenge for U.S. retailers like Macy’s, Target and Best Buy. Some companies are working to move production out of China, others are negotiating with suppliers or even lifting prices for customers as the trade upheaval scrambles profit forecasts. Investors and analysts also want to know: As tariff turmoil ripples across the U.S. economy, are Americans still shopping? WSJ reporter Suzanne Kapner discusses what companies are saying in earnings reports and analyst calls. Hannah Erin Lang hosts this special bonus episode of What's News in Earnings, where we dig into companies’ earnings reports and analyst calls to find out what’s going on under the hood of the American economy. Boycotting Target: A WSJ Podcast Series Sign up for the WSJ's free Markets A.M. newsletter . Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What challenges are retailers facing due to tariffs?
Executives are navigating supply chain disruptions and potential cost increases as a result of tariff policies, in addition to fielding concerns about American consumers and whether or not a weakening economy could shrink household budgets and eventually put a dent in sales.
Though the complete impact of tariffs is yet to be determined, the policy is now facing legal challenges in federal courts, many retail executives are scrambling to respond to the new landscape of global trade. To break down what we learned from retailers in the first quarter, we're here with Suzanne Kappner. Suzanne writes about the retail industry for The Wall Street Journal here in New York.
Suzanne, thanks for joining us today.
Chapter 2: How are retailers responding to supply chain disruptions?
Thanks for having me.
So what did we hear from retailers about how they are responding to tariffs and the related challenges this earnings season? What stood out to you?
Well, retailers have been working really hard to offset the impact of tariffs, mostly by diversifying their supply chains. They are all moving production out of China into other lower tariff countries like Vietnam, Bangladesh. Some are even trying to move minimal production back to the U.S., but that's very small. Macy's, for instance, said it had delayed or canceled some orders out of China.
And Gap said they're actually planning to double the amount of American-grown cotton it buys. So they're working with a variety of levers. They're also trying to wring some concessions out of their suppliers. and some are looking at price increases.
That's one big question when we talk about retail earnings, possibly a big question as retail customers as well who shop at these stores, whether or not we're going to see retail companies raise prices for customers on store shelves as a result of tariff-related costs. A few companies have already opted to do this.
Walmart has said it plans to raise prices this month, maybe early this summer as well. Target has mentioned this might be on the table. What have other retail executives told us about what might happen with prices for shoppers?
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Chapter 3: Are retail prices going to increase because of tariffs?
Yeah, it's really been across the board from Walmart to Ralph Lauren. Companies are talking about price increases, but these are not across the board hikes. They're what companies describe as surgical. So they are looking at price elasticity of products and certain products maybe can bear an increase while others can't. They're afraid to
Demand will dry up if they raise prices, let's say on a T-shirt that's like a very commoditized item, but maybe a handbag that is like hot and in demand, they have a little more pricing power. So this is the exercise companies are working on going through their inventory and seeing where they can raise prices, where they can't.
One notable exception is Gap, which said they have no current plans to raise prices in any meaningful way. They're concerned that their consumer is a middle market sort of moderate consumer, and they don't want to price themselves out of their consumer's reach.
You've written about some of the different ways that retail businesses of all sizes have scrambled to respond to what can be a really rapidly shifting trade landscape. What are some of the different tactics that retailers are trying to adjust in response to all of these tariff-related challenges?
Well, it's been such a fluctuating situation that retailers have had to change their strategies on a dime. You had some of them canceling or delaying shipments from China when tariffs were at 145 percent and instead relying on goods that they had already shipped into the U.S.,
Then when we had that pause and tariffs on Chinese imports fell to about 30% in May, a lot of companies were rushing to get the shipments that they had paused into the U.S. during this 90-day window. And they've been pressuring suppliers to eat some of the costs. They've been trimming their own costs to stay as lean as possible.
The safest bet for these companies is just to continue shifting production out of China immediately. Gap, for instance, at the end of their last fiscal year, which was February, they produced about 10% of their goods in China. Going forward, by the end of this current fiscal year, that will be down to 3%.
Nevertheless, Gap really surprised the market when it said that the extra costs from tariffs would be about $300 million this fiscal year. Now, they are able to offset about more than half of those. But analysts were really still surprised at the size of the tariff-related costs and pushed gap stock down quite a bit.
So even though companies are really scrambling to mitigate, they could still get punished here.
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Chapter 4: What strategies are retailers using to adapt to tariff impacts?
The truth is, it's very hard for retailers to know exactly what is driving spending. And as Macy's CEO said, he thinks that there is some pull forward purchases of big ticket items like mattresses, furniture and jewelry ahead of possible tariff related price increases. But Gap, on the other hand, has said that it hasn't noticed any stockpiling at all.
And I haven't heard too many companies say that they're seeing this pull forward buying activity.
I feel like this connects to another reason why investors pay such close attention to retail earnings in particular, which is that it can offer us clues about the economy and whether or not households are shopping less, maybe feeling strained financially. I know it's one reason why. I pay attention to retail earnings as a markets reporter. Are retailers seeing signs of consumer distress?
Is that something you heard frequently on the calls you're listening to? And how would you describe the health of the American consumer right now based on what we've been hearing?
It's a very bifurcated picture. The lower end consumer has been under pressure now for several years since inflation started to spike up. And any tariff-related additional costs are just going to come on top of that. Target and Kohl's, for instance, said their consumers are under pressure. They're being more choosy in what they buy.
But at the higher end, like Ralph Lauren and Coach and some of these brands that appeal to more affluent consumers, say they are seeing more full-price buying by their customers, that their customers have an appetite to spend up. So you're really seeing the tale of to consumers, the wealthy and the less wealthy. And the wealthy consumers are still spending. The wealthy are still spending, yes.
And the lower income are a bit strapped. With Target and Kohl's, they both kind of called out their consumers being under pressure. But it's also no coincidence that both those companies are struggling from their own missteps. Target, for instance, had to deal with a boycott from its customers over its DEI programs. That could have contributed to some of its sales weakness.
By the way, you can hear more about that Target consumers boycott that Suzanne mentioned in our special two-episode series, Boycotting Target. We'll leave a link to the series in the show notes. So, Suzanne, have any other major retailers gone so far as to cut or adjust their earnings guidance for the rest of the year?
And what are we hearing from executives about what might lie ahead in 2025, even as the details of U.S. trade policy are still changing quite rapidly?
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