Sizing the tariff and immigration policy risks on U.S. retailers
Investing.com -- U.S. retailers are facing renewed risks from President Trump’s latest tariff and immigration policies, as his administration moves forward with measures that could pressure margins and disrupt operations.
According to Bernstein, the retail industry, historically reliant on global trade and immigrant labor, may see significant challenges as these policies take hold.
Tariffs on Chinese imports are viewed as the most impactful. Bernstein analysts estimate that Target Corporation (NYSE:TGT) and Dollar Tree (NASDAQ:DLTR) “are the most exposed to China, given their greater exposures to discretionary categories.”
In 2019, both Target and Dollar Tree experienced 30-40 basis points of gross margin headwinds during impacted quarters, while Lowe’s (NYSE:LOW) reported a similar hit. Although many retailers have since diversified their sourcing, exposure remains.
Target, for example, has reduced its China exposure from 60% to around 30% for its private label discretionary products, with plans to reduce it further.
“As many retailers have diversified away from China, we expect the direct cost impact to be less significant this time around,” analysts led by Zhihan Ma noted.
But while the direct cost impact may be smaller than in previous tariff rounds, uncertainty is already affecting corporate behavior.
In 2019, most retailers issued cautious guidance at the start of the fiscal year. Dollar Tree was the only company in Bernstein’s coverage that revised guidance downward as tariffs were implemented.
Others managed to offset costs and raise guidance later in the year. A similar conservative approach is evident in current guidance trends.
Meanwhile, tariffs on Canadian and Mexican imports are expected to have less effect. These imports are concentrated in commodities and industrial goods, with minimal overlap with consumer retail.
Bernstein projects that for fresh produce sourced from Mexico and Canada, Walmart (NYSE:WMT) and Costco (NASDAQ:COST) face a modest sales exposure of about 1% and 3%, respectively.
“Home improvement retailers also cited some exposure to lumber imports from Canada, but again we believe the risk is manageable,” analysts added.
Immigration policy is also emerging as a labor risk. Although unauthorized workers make up only about 4% of the retail sector’s direct labor force, many work through contractors or gig platforms, leaving companies exposed to enforcement actions or tighter labor supply.
Bernstein also highlighted mass deportation efforts, which could further strain an already tight labor market. The investment bank’s analysts estimate that labor costs account for a high-single to low-double-digit percentage of total revenue for most retailers in their coverage.
“In a tight labor market with a low unemployment rate, retailers have already been paying up to retain their workforce,” they said.
Over the past five years, retail wages have grown at a 4.4% compound annual rate, outpacing the 10-year average of 3.8%.
Analysts believe that “retailers that pay employees poorly (e.g., DG, DLTR) are particularly exposed to future labor cost increases and high turnover,” while Costco is best positioned, with high wages, low churn, and strong productivity.
