SA Asks: Can retailers afford to eat tariff costs?

This past weekend, President Trump criticized Walmart (NYSE:WMT) for saying that it might have to raise prices to offset higher tariffs on imported goods, asserting Walmart (NYSE:WMT) should “eat the tariffs” rather than passing costs onto customers.

Walmart (NYSE:WMT) has since said it is working to keep its prices as low as possible. On Tuesday, Home Depot (NYSE:HD) management said the retailer doesn’t expect to raise prices as a result of the tariffs.

But can other retailers absorb the costs? We asked Seeking Alpha analysts Justin Purohit and Daniel Jones for their thoughts.

Justin Purohit: Walmart’s (NYSE:WMT) recent announcement that it will raise prices due to tariffs doesn’t fare well for other major retailers, who already operate on lower margins. Though most retailers have carried excess inventory from prior ordering cycles, which should have provided some safety against the more near-term tariff impacts, WMT’s announcement may indicate that this cushion has declined faster than expected. In this environment, I continue to view off-price retailers, such as the TJX Companies (NYSE:TJX), as best positioned for tariffs due to its strong operating margins and superior operational sourcing model.

Tariffs will remain the key theme through retail earnings season. Those retailers who have benefited from strong sales trends, like Walmart (NYSE:WMT), may suddenly find themselves in an ill-positioned ordering cycle with lower inventory stocks. Those with lower pricing power or less flexible sourcing strategies may see margin pressure in the coming quarters.

Daniel Jones: When news broke that Walmart (WMT) would likely be raising prices, Donald Trump warned the company not to. Rather, he said, the retail giant should “eat” the tariffs instead of passing them on to customers. Frankly, this is not something that can really be done.

The good news for Walmart (WMT) is that around two-thirds of what it sells is made, assembled, or grown here at home. Last year, in fact, the company purchased $296 billion worth of products from the U.S. market. About 60% of what it purchases in total comes from small businesses. In 2021, the company promised that it would add another $350 billion in U.S. made goods over the ensuing 10 years. So the business has been moving in the direction of reducing exposure to foreign goods for quite some time now.

Having said that, it still imports a large amount of what it sells from not only China, but also Mexico, Vietnam, India, and Canada. Management warned in their latest earnings call that they began seeing pressure from a price perspective in late April, and throughout May, they have seen that pressure accelerate. The company did say that its plan is not to raise prices on food if it can avoid it. Some of the tariffs here could be offset by the company making some changes like controlling fresh food waste, and pushing those tariffs onto non-food products.

But the prospect of the company eating any significant portion of tariffs is absurd. Last year, Walmart (WMT) generated a net profit margin of only 2.85%. This means that its ability to just absorb higher costs will be limited.

One company that could be facing some problems is Best Buy (NYSE:BBY). Back in early March of this year, management said that a 10% tariff on China alone would impact comparable store sales growth by one point this year. Obviously, the situation has changed quite a bit since then.

Management claimed that only 2% to 3% of its direct purchases are imported from other countries. However, its suppliers import a lot of what they sell to the company from other nations. In fact, about 20% of what Best Buy (NYSE:BBY) sells is sourced from Mexico in some way, shape or form.

Best Buy (NYSE:BBY) did mention the prospect of working with vendors. But almost certainly, the tariff situation will prove painful for the business. In 2024, the net profit margin for the company was 2.23%. If you assume that the U.S. consumer is going to remain weak for a while because of tariffs, this will only add pain to the company and could cause it to report even weaker results moving forward. While it might attempt to absorb a small portion of the tariff costs, it is impossible for the company to absorb most of the hit. Consumers will see prices increase if things stay as they have been.

Another retailer that is likely to face issues because of the tariff situation is Macy’s (NYSE:M). Unfortunately, just like most other retailers, its ability to contend with what is undeniably a massive tax on the American consumer is incredibly limited.

For starters, last year, Macy’s (NYSE:M) had a net profit margin of only 2.53%. It would be one thing if the company was growing nicely. However, over the last three years, revenue has dropped by 9.6% while net profits have plunged 49.2%. The last thing the company needs is an additional tax to spread to its shoppers, a tax that is sure to be harmful for consumer spending more broadly.