What American Hardline Retailers Are Saying about Tariff Fallout

Goldman analysts met with management and investor relations teams from specialty hardline retailers (BBY, BJ, DG, DKS, FL, OLLI, RH, TGT, ULTA, WMT, WOOF) to assess tariff exposure, consumer behavior, and macroeconomic challenges amid 145% tariffs on Chinese goods and the average US tariff rate at its highest since the 1930s. 

Here are the conversations Kate McShane, Mark Jordan, and other analysts had with IR and management teams from retailers: 

Best Buy

Tariff exposure and impacts. Given President Trump’s recent exclusion of electronics from tariffs, management noted that their exposure is likely even lower than the 20% remaining China tariff. BBY is still trying to figure out their tariff situation by talking to vendors, but noted that most of their COGS that originate from Mexico are under exclusion as well (leaving them at low exposure for Mexico). Management also emphasized that the tariff exposure to comp headwind correlation is not linear, as vendors have multiple sites of manufacturing and it is largely dependent on the trade offs vendors make. When comparing tariffs to 2018/2019, they noted that last time, tariffs came through on large appliances, and most of the product categories did not get hit much since they were also exempted. At the moment, management does not believe they have taken prices up (they anticipate tariffs impacting 2Q-4Q), and as of last earnings call, have not brought in any inventory early for tariffs.

Navigating consumer elasticity and macroenvironment. Management stated that their guidance takes into account their potential estimate for consumer elasticity, as they accounted for factors such as product levels, vendor price increases, potential declines in purchased units, etc. They are also involved in weekly planning given the macro-environment, and are preparing themselves and their vendors to be ready in case of any quick tariff changes. In the case of a recession, management noted that there are still many levers they could move to preserve profitability, such as changing labor demand and reducing various SG&A expenses.

BJ’s Wholesale Club

BJ could benefit as a limited SKU retailer when it comes to tariffs. General merchandise comprises less than 15% of BJ’s overall business. Management explained that BJ’s limited SKU count and reliance on a treasure hunt experience gives the company more flexibility than some others. For example, BJ could forgo certain SKUs and offset that with other SKUs, making calculated choices depending on the situation.

BJ expects to see SG&A deleverage this year but automation helps offset. On the 4Q earnings call, BJ guided to SG&A deleverage, driven by an acceleration in new club openings, particularly with continued outsized growth in depreciation as the company owns more of the clubs its opens. BJ plans to be disciplined from an overall cost perspective. Management also noted that the use of automation, such as autonomous robots in inventory, can help minimize footsteps and labor hours, allowing for more labor hours to go towards customer-facing tasks.

Dollar General

Improved execution leading to trade-in. In their last earnings call, DG noted that the trade-down between higher income consumers has been accelerating between 4Q and 1Q. Management noted that the reason they didn’t see this trade-down earlier is likely due to some consumers taking a little longer to feel pressure, but also because of improved company execution. DG believes they are in a better spot today to receive trade-down needs than they were 6-9 months ago, which will allow them to create better impacts on their trade-in customers. Specifically, management noted that they are better positioned in their in-stock levels, SKU reduction strategies, and are investing more in their back-to-basics, which is translating to the top line.

No significant changes on SNAP. Management stated that they are watching SNAP carefully and believes that the low income consumer is still under pressure, but has not confirmed any significant changes related to SNAP. They noted that in the past they have seen significant impacts when there are full-scale cuts on SNAP, but it is not as impacted when it is only work requirement changes. They also stated that if there were certain foods removed from SNAP, they would likely see more of a gradual impact than immediate, given that the consumer will not stop buying the foods they regularly eat immediately. Currently, SNAP accounts for ~MSD of DG’s sales.

DICK’S Sporting Goods

DKS’s position in a difficult macro backdrop. Per management, DKS is uniquely positioned in the marketplace, especially during challenging times, as its offering enables people to go outside and manage stress in an accessible way. Additionally, people are not willing to forgo things they consider essential, such as cleats that fit their kids or running shoes, which they often view as more necessary than discretionary. In terms of Game Changer, management highlighted that it has become an indispensable piece of the youth sports ecosystem and remains confident in the business in a tougher macroeconomic environment.

The company could benefit from elevated inventory. Exiting 4Q, DKS’s inventory was up 18%, more for other reasons (e.g., its Southern store strategy, strategic investments) versus getting ahead of tariffs. As a result, there could be some unintended benefits from the higher inventory. The inventory consists of some seasonal and some core product, and it was a focused investment into certain brands categories that have been fueling top line growth to keep the momentum going.

Foot Locker

FL’s tariff exposure. FL’s private label is a LSD percent of sales, with about half of that being sourced through China and the balance through other Southeast Asian countries. FL’s partners also have exposure to China, while noting their exposure to that region has come down over the past several years, particularly following 2018/19 tariffs. Per management, the company is working through this with their partners through a lens of mutual profitability. FL noted that their outlook for the year still suggests that they will continue to make progress against their Lace Up plan.

FL noted its inventory was in a good place coming out of 4Q. FL’s inventory levels were up 1% coming out of 4Q, and the company saw improved inventory turns last year. Per management, FL wants to leave some flexibility to lean into any traffic-driving promotions, rather than needing to clear inventory. In terms of inventory management, FL plans to continue to be agile and respond to the overall macro environment.

Ollie’s Bargain Outlet

Supply chain opportunity and flexibility in the current environment. Management addressed investor concerns that supply chain opportunities could be limited in the near term if tariffs persist, by noting that OLLI has already factored that into their strategies, and is continuing to aggressively buy product. In the case that supply chain products are limited, management is not worried given that there is still a lot of merchandise from distressed stores and bankruptcies. While they have not currently seen mass cancellations of orders yet, they highlighted that once more imports arrive from China, companies will have to start canceling orders, likely allowing OLLI to benefit from this excess merchandise. Management also noted that they are currently buying more domestic product and are not buying certain product categories from China (the only category at risk is seasonal items); however, they are not worried about their product mix, as their consumers are trained for a treasure hunt environment. Given OLLI does not have a set planogram merchandise model, consumers are not expecting them to have the same products every time, which allows OLLI’s buyers to flexibly chase different products.

Restoration Hardware

RH plans to work through its elevated inventory which will help with FCF. RH has $200-300mn in excess inventory, with the company noting it bought heavily in advance into its new collections which were trending well. RH plans to work through the inventory this year, without providing a timeline on when this will be done. The company is not buying as much unless it is new collections (i.e., new items in its sourcebooks) or for customers’ custom orders.

While the macro remains challenging, RH seeks to benefit from newness. RH sees an impact on its customer base when mortgage rates go above 7%. In terms of correlation with the stock market, wealthy customers might wait and not purchase in a certain month, and in general, the company sees a correlation between mortgage rates and existing home sales. Per management, RH set out to gain market share with newness, noting that from 2019-22, the company did not offer newness. RH noted it is currently benefiting from the transformation through market share gains, given its compelling offering, scale, and pricing.

Levers RH could pull in a difficult environment. RH noted it could potentially monetize assets through sale leasebacks, which it has done in the past. The company added that its marketing spend is over $100mn, which it could cut back on, along with salaries, corporate headcount, or ongoing projects/investments. RH pointed to its 4/6/20 press release (linked here) as an example of what it has done historically.

Target

Prices will likely increase, while elasticity is hard to predict. In terms of direct exposure to China, private label is 30% of sales, and 30% of their private label comes from China. Direct imports are more in home and apparel, while indirect is more of electronics and toys. TGT noted that unit demand is going to be tough, and elasticity is hard to predict as it changes over time depending on the macro backdrop. Per management, the expectation is that everyone will have to take price. That said, TGT highlighted that it maintains a strong balance sheet and feels good about its ability to manage this.

TGT plans to remain agile on its inventory position. TGT noted it has not brought in product early to any great degree in the current environment as there is not limitless storage, while adding it has a mindset to remain ready and agile. We would note that TGT ended the year with ~7% y/y inventory growth, which management noted in March was a function of strategic decisions versus sitting on unproductive inventory. Given TGT’s guests over-index to interest in newness and on-trend product, the company was trying to get a jump start on the year and pulled forward some receipts (e.g., spring sets for hardlines and apparel).

Ulta

Ulta Beauty at Target shop-in-shop openings will pause in 2025. At a recent conference, ULTA mentioned it would not be opening additional Ulta Beauty at Target locations this year and would instead be focusing on the existing 610 stores. Per ULTA, this decision will allow the company to incorporate learnings and strengthen existing stores before continuing the expansion.

ULTA’s tariff exposure. In FY24, only ~1% of ULTA’s receipts were direct imports, noting this is mostly related to the Ulta Beauty Collection and gifts with purchases. ULTA is talking with its manufacturers and suppliers on how to mitigate tariff impacts. The Ulta Beauty Collection has exposure to China but also Canada and Europe. Prestige brands are more exposed to North America and Europe, while mass has more exposure to China/Asia. On the indirect side, it is more difficult as ULTA works with 600 brands, which includes smaller brands without broad global supply chains.

Ulta hires new Chief Merchandise Officer. On 4/17, Ulta announced they hired Lauren Brindley as their new Chief Merchandising Officer to replace retiring CMO, Monica Arnaudo. When speaking with the company, they highlighted Ms. Brindley’s more than 20 years of experience in beauty, from both the retail and brand perspective and her experience and relationships across the beauty spectrum, from mass to luxury. Ms. Brindley also led the development of the Boots No 7 brand and has strong brand building experience. Additionally, having served as a CEO of Revolution Beauty, she brings an enterprise view to the merchandising and digital role.

Walmart

Discretionary categories are underperforming. WMT has not pulled forward inventory in anticipation of tariffs due to the uncertain backdrop. The company plans to lean heavily into value, noting the more discretionary side of general merchandise is underperforming. That said, seasonal events remain productive for WMT, and the company plans to focus on grocery for upcoming events, while for back-to-school, it will lean into consumables.

WMT is benefiting from automation. 60% of WMT’s fulfillment volume today is moving through automation, and ~55% of stores are receiving automated freight. The automation cycle is scheduled to roll out through 2029, with cost savings already there today but not sizable enough yet to call out. As a result of automation, inventory efficiency has increased over time.

Sam’s Club is well-positioned for omnichannel growth. WMT is positioning Sam’s Club as an omnichannel club, noting that the market still feels underpenetrated. The Sam’s Club and Walmart US e-commerce supply chains are merging, and e-commerce fulfillment will be done through the Walmart system. As a result, per management, the cost is much lower and the network already exists. While clubs are usually for a stock up versus a top up trip, prepared meals is one of the fastest growing areas for Sam’s Club.

Petco

Commentary on tariffs and pricing: Management noted that owned brands represent 5% of COGS with exposure in China, Mexico, and Canada, with China being the largest. The company also noted that price hike and 10+ mitigation strategies have been under consideration with the aim to mitigate potential impacts on national brands.

Competition: The company had no specific update on peer activity. Management has been focused on defining Petco’s position in the market and identifying differential points. The company is focused on understanding the core customer with an emphasis on internal brand definition, analyzing broader industry dynamics, and going back to retail basics.

The key takeaway is clear: investors and consumers should favor retailers with supply chains outside of China, while penalizing those that are heavily reliant on Chinese imports. 

More color here: Tariff Shockwave: These Apparel Brands & Retailers Most At Risk Of Price Hikes & Making Sense Of Discretionary Retail Math As EPS Risks & Price Hikes Loom