By Sabrina Escobar

Retailers have spent weeks fretting about President Donald Trump's "Liberation Day," bracing for a round of tariffs that could wreak havoc across the industry. Investors have been avoiding consumer- discretionary stocks, concerned higher import costs could hurt profits.

That has made retail a tough sector to bet on. The SPDR S&P Retail exchange-traded fund is down 11% this year, more than double the S&P 500's 5% loss. The sector will remain risky until the outlook for tariffs is clearer, but there are still places to invest.

Trump is expected to announce the tariff changes at 4 p.m. Wednesday. There are two main options on the table.

One is a global tariff that would set a baseline levy on all imports into the U.S. The other would be reciprocal measures aimed at countries that export more to the U.S. than they import. UBS's economics team suggests reciprocal tariffs could land on the 15 or 20 of the U.S.'s key trade partners that account for about 75% of imports.

"Although the precise path toward implementation is unclear, on both tariff levels, products, & geographies, one thing we can say with clarity: Tariffs are going higher, and companies should be prepared to mitigate the effects," wrote a group of Morgan Stanley analysts in a late March note.

Navigating Tariffs

Many retailers are already exploring tactics such as increasing prices, negotiating with vendors, redirecting products to markets without tariffs, stockpiling inventory, and diversifying supply chains. And even before the current Trump administration, the industry has been moving away from Chinese imports in response to the tariffs he imposed during his first term. Production is shifting to countries in Southeast Asia and Central America, which is expected to continue.

That means retailers are generally better positioned to navigate tariffs today than they were in 2018, when the first wave of Chinese tariffs went into effect, wrote CFRA analyst Arun Sundaram in a research note last week.

But these efforts won't blunt the impact altogether. Morgan Stanley analysts have estimated that earnings per share for fiscal 2025 could fall by 13%, on average, for hard-line and food retailers, and 18% for apparel companies, with a wide divergence between companies. Morgan Stanley's estimates only factor in the additional 10% tariff on Chinese imports that has already been implemented, meaning the damage could be worse if the administration announces additional tariffs on China or other countries.

And that is assuming Wednesday's tariffs are final, rather than an opening salvo that paves the way for further negotiations. The uncertainty could be just as damaging for consumer stocks -- if not more so -- than the tariffs themselves, argued Carey Kaufman, U.S. consumer strategist at Jefferies.

"The impact of the erratic nature -- including actual or potential reversals of already enacted or threatened policies -- is most certainly valuation compressing [near term] with almost no clear path for multiple expansion," Kaufman wrote on Sunday.

Investing Through the Noise

Betting against U.S. consumers is usually a losing bet, Kaufman added, but assuming they will just keep shopping is also risky right now. He recommends finding a midpoint: stocks in industries that are usually stable, with reasonable valuations.

In Kaufman's view, discount retailer Ross Stores fits the bill. Shares trade at 19.5 times next year's earnings, according to FactSet. Off-price chains have taken a relatively upbeat tone about the tariff outlook, noting that one of their advantages is that they tend to buy out-of-season products from other retailers, rather than importing most of their merchandise themselves.

Finding companies that aren't too exposed to tariffs, or are better able to offset the effects, could also be a smart play.

CFRA's Sundaram's top picks in the big-box retail space are Walmart, Kroger, and BJ's Wholesale Club Holdings. Grocers such as Kroger tend to import less from China, and while a good chunk of fresh produce is imported from Mexico and Canada, Kroger executives have said the company has a "mid-single-digit" exposure to those imports. The scale of companies like Walmart and BJ's gives them power to negotiate better prices with suppliers.

Home improvement may be another relatively protected sector, wrote Evercore ISI analyst Greg Melich. His two preferred stocks, Sherwin-Williams and Home Depot, both cater to professional contractors who still need to buy paint and building products, giving the companies extra pricing power.

Specialty retail and apparel is a bit trickier to navigate because companies may have fewer mitigation strategies available to them. Fashion trends are seasonal and change quickly, preventing companies from stocking inventories ahead of time out of fear of having to discount products at a loss if they don't sell, noted Morgan Stanley analyst Alex Straton.

Prices for apparel have tended to decline over time, limiting the sector's ability to charge more in response to tariffs. To top it all off, many companies are sourcing more from Vietnam, which could soon be subject to reciprocal levies. Straton's bet is that Bath & Body Works and Levi Strauss are most insulated from tariffs because they don't rely heavily on either China or Vietnam.

The other point to remember is that even retailers that don't depend on imports will struggle if the levies and cuts to government employment make shoppers pull back. Management skill will help determine who weathers the storm.

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.

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April 02, 2025 11:30 ET (15:30 GMT)

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