Walmart's total revenue rose 4.8 per cent from the same period last year, while its ecommerce sales grew 25 per cent.Mike Blake/Reuters
U.S. retailing giants took a tough line on price hikes when they reported their quarterly financial results in May. Now, as U.S. President Donald Trump’s tariffs settle in, these same retailers are accepting that prices must rise.
That adds a new wrinkle for investors as the economy slows and central banks consider rate cuts.
When Walmart Inc. WMT-N reported its latest quarterly results this week, for the three-month period that ended July 31, it delivered a lot of good news.
Total revenue rose 4.8 per cent from the same period last year, underscoring the retailer’s long-standing appeal with a broad cross-section of global consumers. Walmart raised its earnings outlook for the remainder of the fiscal year.
Walmart raises annual forecast as low price focus draws shoppers
Its e-commerce sales grew 25 per cent, highlighting its online growth prospects. And the retailer checkmarked its move into artificial intelligence, outlining its ambitions for a new AI-driven shopping assistant, nicknamed Sparky, to help with everything from reorders to returns on its app.
“We see Sparky becoming an indispensable part of how people shop with us,” Doug McMillon, Walmart’s chief executive officer, told analysts during a conference call.
But Sparky was no match for a hot topic that has been simmering ever since Mr. Trump announced sweeping tariffs on trading partners earlier this year and then told retailers to eat the higher costs rather than pass them along to consumers: Will Walmart heed the president’s words?
The answer appears to be: No.
Mr. McMillon said that Walmart was keeping its prices as low as it can for as long as it can. But that was easier to accomplish in the first quarter, when tariffs were still pretty new, than it is today.
“As we replenish inventory at post-tariff price levels, we’ve continued to see our costs increase each week, which we expect will continue into the third and fourth quarters,” Mr. McMillon told analysts.
As a result, he added, Walmart is either absorbing the higher costs or reluctantly increasing prices – and that raises a couple of big questions for investors.
If Walmart is feeling the impact of tariffs, how are smaller retailers faring?
And: Is this a sign that Mr. Trump’s tariffs will indeed feed into U.S. inflation, despite encouraging signs initially that they have had little impact?
Walmart’s share price fell 4.5 per cent on Thursday, after it reported its results.
The dip may have been driven partly by a profit that was shy of analysts’ estimates: While Walmart reported earnings of 68 US cents per share, analysts had been expecting 74 US cents per share.
But the tariff impact adds to concerns that could resonate well beyond Walmart or even the retail sector, especially if other companies report similar pricing pressures.
Earlier this week, Home Depot Inc. HD-N said that, despite plans to hold prices steady on imported products soon after tariffs were introduced, it will raise them and it has already pulled back on some promotional activities, such as discounts on some garden items.
“Tariff rates are significantly higher today than they were when we spoke in May. So as you’d expect, there’ll be some modest price movement in some categories,” Billy Bastek, Home Depot’s head of merchandising, said during a conference call.
Home Depot misses second-quarter sales estimates
Also this week, Target Corp. blamed tariff pressures for some of its shrinking profit margins in its second-quarter results. The stock, already reflecting the effects of sluggish sales and concerns that the retailer’s prices are too high, fell 6.3 per cent on Wednesday.
There are reasons to keep a cool head here.
For one, tariffs only hit products that are imported into the United States. In Home Depot’s case, 50 per cent of its products are sourced domestically and not subject to tariffs; in the case of Walmart, about two-thirds of its products are sourced domestically, giving it some power to hold off price increases.
For another, some retailers are not seeing a dramatic shift in consumer behaviour, even as they pass along some tariffs.
Walmart noted that its price increases have been gradual, leading to muted responses mostly by lower- and middle-income households, which suggests that the price hikes could be absorbed.
Still, Walmart’s acknowledgement that tariffs are having an impact on its operations adds a risk to the broader bullish thesis that rests on rising corporate profits and central bank rate cuts.
Federal Reserve chair Jerome Powell in a speech on Friday opened the possibility of a rate cut as soon as next month, which drove stocks higher. However, he also cautioned that rising consumer prices from tariffs “are now clearly visible.”
Tariffs have been virtually ignored during a strong market rebound that began in April. Perhaps they deserve more attention.