By Suzanne Kapner and Sarah Nassauer
Sales at several major chains slowed during the latest quarter,
clouding the outlook for the retail sector as it braces for the
impact of higher tariffs on merchandise imported from China.
Kohl's Corp., J.C. Penney Co., and Nordstrom Inc. reported
declines on Tuesday, while Home Depot Inc. posted a
weaker-than-expected 2.5% rise in comparable-store sales.
Earlier this month, the Trump administration imposed a 25%
tariff on $200 billion in Chinese goods, up from a 10% duty put in
place in October. The U.S.-China trade fight has left American
shoppers largely unscathed, as major consumer categories, including
apparel and toys, have eluded tariffs so far.
Currency fluctuations also have made imports cheaper, and U.S.
retailers have worked to reduce costs elsewhere to avoid raising
prices. But prices have risen on some items, including bicycles,
auto parts and furniture; and retailers say they are formulating
plans to manage the 25% tariff.
Kohl's, which imports about a fifth of its goods from China,
said Tuesday that additional costs related to rising import tariffs
prompted it to lower its guidance for the year.
Home Depot finance chief Carol Tomé said the home-improvement
chain estimates it will spend about $1 billion more to buy goods
with the 25% tariffs in place, coming on top of the roughly $1
billion in costs added by the 10% tariff.
The company said it plans to manage the cost increases by buying
more volume at lower prices from some vendors and by spreading
price increases across a wider swath of items to limit the impact
on sales. "There is a lot of work that has to go into this before
we can actually determine the impact," Ms. Tomé said.
Last week Walmart executives said they will likely raise some
prices in the face of tariffs, but are managing cost increases
product by product.
Generally, large retailers are better positioned to extract
price cuts from suppliers or spread increases strategically across
all the items they sell to mitigate the impact on sales, say
analysts. And purchases of products like auto parts that are needs,
not wants, are less likely to decline because of tariff-induced
price increases.
AutoZone Inc. Chief Executive Bill Rhodes said it is too early
to know how the 25% tariff will affect costs and prices. "If we do
in fact experience higher costs it will be our intention to pass
those higher costs on to our customers," he said Tuesday on a
conference call to discuss earnings.
Around 30% to 45% of auto-parts sales originate from China,
Wells Fargo said in a report.
Retailers won't have to absorb cost increases until early June
when many products subject to the 25% tariff come off container
ships in U.S. ports, said Brad Loftus, senior partner in the retail
practice at Boston Consulting Group.
Retailers are using short-term tactics like asking shipping
companies to speed vessels to arrive ahead of any more tariff
increases, Mr. Loftus said. Longer term, retailers are working to
diversify sourcing options and creating more responsive pricing
practices, he said.
Late last year Home Depot opened a new sourcing office in
Vietnam and is considering moving production of some goods outside
of China, Ms. Tomé said.
Kohl's shares fell more than 12% on Tuesday, and Penney's fell
about 7%. Shares of Home Depot and TJX Cos, which also posted
results, rose slightly. In after-hours trading, shares of
Nordstrom, which reported results after the market closed, fell
more than 8%.
The retail chains pointed to a range of factors for their weak
showing in the latest quarter, but consumer spending wasn't cited
as an area of concern.
"All the indications continue to be really strong in terms of
unemployment [and] customer confidence," said Kohl's CEO Michelle
Gass.
Also, Tuesday's results contrast with strong reports from other
major chains, including Walmart Inc. and Macy's Inc. last week and
TJX. The parent of T.J. Maxx and Marshalls said its
comparable-store sales rose 5% in the latest quarter. Comparable
sales exclude the impact from newly opened or closed stores.
Home Depot isn't seeing any signs of consumer weakness, Ms. Tomé
said. "I expect it's because of the nature of our consumer,
generally homeowners," able to rely on their home's equity to make
fixes if needed, she said.
The retailer said it was hit by lumber price deflation and rainy
February weather that hampered some seasonal buying. It said sales
are picking up with warming weather, and the retailer maintained
its guidance for the year.
Home Depot has reported strong quarterly sales in recent years
and invested to drive its online business, especially through
allowing shoppers to buy online and pick up in stores.
Kohl's, whose comparable-store sales fell 3.4% in the latest
period, blamed cool spring weather as well as more competitive
pricing and promotions by competitors.
It expects sales growth to resume in the second half of the
year, though profit will likely fall as it plans to increase
promotions.
Kohl's total revenue fell 2.9% to $4.09 billion in the quarter
ended May 4. Net income tumbled 17% to $62 million.
Nordstrom said its 3.5% decline in net sales was self-inflicted
and that it is working to improve its relaunched loyalty program,
invest more in digital marketing and tweak its merchandise to
better align with customer demand.
Penney, whose comparable-store sales fell 5.5%, has been
struggling to turn itself around under its new chief, Jill Soltau.
She said the company is focused on getting the basics right, such
as buying the right products, marketing them appropriately and
reducing inventory. Ms. Soltau said she plans to outline a broader
strategic plan in coming months.
Penney was also hurt by its decision in February to stop selling
major appliances, and sell furniture only on its website and in
some Puerto Rico stores, a reversal of the prior CEO's strategy.
Total revenue at Penney fell 4.3% to $2.56 billion in its May-ended
quarter. Its net loss widened to $154 million from a loss of $78
million a year earlier.
Penney, based in Plano, Texas, has been hiring executives to
carry out its turnaround plan, and on Tuesday it said it brought in
a chief customer officer, who will join the firm from grocery chain
Sprouts Farmers Market.
--Aisha Al-Muslim and Micah Maidenberg contributed to this
article.
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Sarah
Nassauer at sarah.nassauer@wsj.com
(END) Dow Jones Newswires
May 21, 2019 18:52 ET (22:52 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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