By Sabrina Escobar

Retailers have been bulking up inventories in a bid to get ahead of President Donald Trump's new tariffs. While that should give the industry -- and consumers -- a short-term reprieve from higher import costs, it could create supply-chain headaches in the long run.

The retail industry has bracing for the tariffs since Trump won the November election and emphasized that new levies would be a cornerstone of the administration's trade policy. Although the precise nature of the new tariffs is still in flux, Trump has been steadfast in his resolve to impose levies of some sort. A baseline 10% duty on most imports went into effect earlier this month, as well as a roughly 145% rate on Chinese products.

Many companies immediately began to pull forward their import orders to get merchandise stateside before costs went up, ramping up the efforts this year.

As of March, total imports are up 4.3% this year compared with a year ago at the Port of Los Angeles, and a whopping 28% at the Port of Long Beach. Imports at the Port of New York and New Jersey rose about 9% on average in January and February (the port has yet to release March statistics).

That has trickled down to retailer inventory levels. Target saw a 7% year-over-year increase in inventories at the end of its fiscal quarter in January, and Walmart said inventories were 2.8% higher from last year.

"Our in-stock levels look good," said Walmart CECO Doug McMillon on an earnings call with analysts in February. "We did pull a little bit forward around the edges, but we're selling through that stuff quickly. So, really in a good place to begin February."

The forward purchases should "give retailers a few months of cushion before needing to restock," wrote Arun Sundaram, an analyst at CFRA, in an April 11 note. They could also be helpful if consumers, like retailers, go shopping in the spring to offset future tariff pain, spiking demand in the near term. Retail sales rose 1.4% in March from February largely because of consumers' pre-emptive purchases.

It's unclear what steps retailers will take next as both new and existing tariffs are implemented. The National Retail Federation expects the sector will reduce imports and rely on built-up inventories, "at least long enough to see what will happen next." Hackett Associates, a consulting and advisory firm for trade logistics, estimates that imports during the second half of 2025 will be down at least 20% year over year.

Despite the prospect of fewer items entering the U.S., no company has yet sounded the alarm about potential product shortages. But retail experts warn that shortages are a possibility until there is more certainty about the final tariff regime. A postelection survey of 100 retail chief financial officers conducted by consulting firm BDO found that only 22% of respondents said their inventories were healthy, while 58% reported moderate or extreme inventory shortages.

Some degree of scarcity can be good for retailers' margins, as it gives them leeway to hike prices, or at least to sell the item at full price. But too many out-of-stocks can erode the consumer experience, jeopardizing sales growth. Companies may also have to resort to more expensive forms of shipping, such as airfreight, to restock the item, which would eat at profits.

On the flip side, bulking up too much carries its own risk, especially if consumer demand weakens in the coming months, as many economists are forecasting. When retailers have too many products in warehouses and not enough people buying them, they are forced to sell them at a discount, which eats into profit margins.

This will be especially painful as investors have gotten used to strong margin performance in the past couple of years, wrote Jefferies analyst Randal Konik in an early April note. He estimates that margins for companies in his coverage area hit historic highs in fiscal 2024, but have struck a more cautious note to kick off the 2025 fiscal year.

"As companies released 4Q results, given tariff risk, weaker demand, and a more volatile macro environment, managements made clear in their '25 guides that we're past the peak," he wrote. "We expect higher inventories to further amplify margin pressures and elevate markdown risk for retailers trying to recoup sales with higher promos."

For now, retailers are walking a tightrope between securing supply and avoiding a glut, a delicate balance that will likely define their bottom lines in the months to come.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 22, 2025 01:00 ET (05:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.