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Noise around tariffs and consumer costs are rising as Donald Trump sets the stage for a White House return.
The president-elect has floated the idea of a 10% tariff on all imports and 60% on Chinese imports to cut the trade deficit. The proposal could hit discount retailers and footwear makers particularly hard, pros say.
"Companies like Five Below are going to be disproportionately impacted by by tariffs, and they'll undoubtedly have to increase prices," Arun Sundaram, a CFRA analyst, told Yahoo Finance. Shares of Dollar General (DG), Dollar Tree (DLTR), and Five Below (FIVE) all fell on Wednesday.
"The good thing about Five Below ... they sell products at different price points," said Sundaram. But dollar stores are more constrained because they have fixed prices, for example $1.25 for Dollar Tree.
The combination of tax cuts and tariffs is expected to create inflationary pressure, just as prices were decelerating for big-ticket items. Tariffs are a headwind for all general merchandise retailers that sell categories like apparel, furnishings, and electronics. During Trump's first term, companies dealt with Chinese tariffs by eating the costs or passing them on, Scott Lincicome of Stiefel Trade Policy Center told Yahoo Finance.
Wayfair (W) shares fell 12% on Wednesday, while Best Buy (BBY) fell 4% and Home Depot (HD) dropped 3%
Wayfair CEO Niraj Shah said on the company's latest earnings call it has more than 20,000 suppliers, including domestic suppliers.
"The notable things were the tariffs [for China] during the first Trump administration, where it got to 10% and then 25% ... Ever since then, what you've really seen happen is there's been a lot of suppliers who built manufacturing capabilities in Cambodia and Vietnam, in Malaysia, Indonesia, other places, so that they actually have more control over their future should the tariff landscape change," Shah said.
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Footwear companies are facing a tough road. Brooks Running CEO Dan Sheridan called it a "huge headwind" for the entire industry, as it already faces a 20% tariff on imports from China and a roughly 27% tariff on Vietnam imports.
"An additional 20-25 (percent tariff) ... it's huge. The conversation is massive," he said on Yahoo Finance's Opening Bid podcast. "To absorb that as a business begins to take investment out of R&D ... We have to pass those on to the consumer and you can't pass a 25% lift in cost completely."
Skechers (SKX) CFO John Vandemore shared a similar notion with Yahoo Finance at Goldman Sachs' Global Retailing conference in September.
"It's the choice between sustaining margins and being able to continue to deliver innovation and comfort; we may have to take action on price," he said. While Skechers has plans to diversify its production outside of China, the country is still a significant manufacturing base.
Matt Priest, the CEO of the Footwear Distributors and Retailers of America (FDRA), told Yahoo Finance the footwear industry started "moving away" from China long before Trump took office in 2016, but his additional tariffs "poured an accelerant" for those who had not.
Yet China's cheaper manufacturing cost means mass retailers have to source from the country to provide competitive prices to working-class families.
"Our ability to rely on foreign sources is critical, while at the same time, we understand ... the incoming Trump administration may find the need to search for ways to protect really critical national security interests," Priest told Yahoo Finance.
"We support that as well. We want to be in a position to make sure ... the administration thinks more critically about how it approaches it so that the president-elect can meet his commitment of lowering inflation. We think he can do that by taking away duties on consumer goods," Priest told Yahoo Finance.
President-elect Donald Trump holds a big and a small box of Tic Tacs to illustrate inflation outcome during a town hall event at Dream City Church in Phoenix, Ari., on June 6, 2024. (JIM WATSON/AFP via Getty Images) ·JIM WATSON via Getty Images
With Americans fatigued from years of inflation, Trump may not immediately take action that could lead to higher costs.
-"The [first] Trump administration avoided consumerfacing products from China on the first go round ... I don't think it's a slam dunk that the Trump administration on day one is going to slap 60% tariffs on smartphones from China," Lincicome said. "The backlash would be rather substantial and immediate,"
Should the proposed tariffs go into effect across apparel, toys, furniture, household appliances, footwear, and travel goods, the National Retail Federation estimates it could reduce Americans' spending power by $46 billion to $78 billion every year.
“Effective trade policies will increase America’s competitive advantages in research, development, and innovation and will protect strategically critical infrastructure," National Retail Federation CEO Matthew Shay told Yahoo Finance.
"However, the adoption of across-the-board tariffs on consumer goods and other non-strategic imports amounts to a tax on American families. It will drive inflation and price increases and will result in job losses."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
