Off-price retailers have yet another advantage over their competition: a measure of protection against protectionism.
Tariffs were among Donald Trump’s favorite ideas during his presidential campaign and he has continued to float various levies on imports since his electoral victory last month. As a result, chatter about the effect of tariffs on retail is on the rise, though the topic is rife with uncertainty.
“Will Trump really put in place 60% tariffs on goods coming in from China and 10% across-the-board tariffs on other trading partners? Or will a watered-down version be the more likely outcome?” Wells Fargo economists Tim Quinlan and Shannon Seery Grein said in a research note. “Even in the case of milder tariffs, history teaches us to expect immediate, tit-for-tat retaliatory tariffs. On that basis, the sooner a business can procure the needed inputs the less costly they will be, at least on a very basic level.”
Questions are now popping up during recent earnings calls, with some retailers expressing uncertainty about what may transpire. Lowe’s executives, for example, recently warned that, despite some defensive measures taken following the first round of Trump tariffs, about 40% of the goods they sell continue to be sourced overseas, and that they are preparing as best they can.
That’s a tall order.
“Inventory management is a trying job at the best of times, but rising tariffs make it even harder,” the Wells Fargo economists said. “Stocking up on whatever you need sounds easy, but at a time when inventory financing remains dear, that’s an expensive fix.”
Various other economists and analysts also say that tariffs are likely to keep inflation — a major pain point for consumers for a couple of years now — elevated.
But off-price retailers are mostly shrugging this off, for a few fundamental reasons.
The sourcing model
The nature of off-price retailers’ merchandise pipelines — where much of their assortment is obtained from retailers and brands offloading excess inventory — serves as a cushion against tariffs. In fact, this possibly gives them an advantage, according to analysts and the companies themselves.
“We view off-price as relatively insulated from tariff risk given low direct import exposure,” Bank of America analysts Lorraine Hutchinson and Melanie Nuñez said in a Nov. 14 research note. “Off-price primarily sources product domestically, protecting them from taking on a significant incremental tariff cost directly.”
Burlington, for example, this year will have directly imported about 8% of its merchandise, the vast majority from China, so that “well over 90% of our buys are on merchandise where we are not directly paying the tariff,” Chief Financial Officer Kristin Wolfe told analysts in November.
Off-pricers may not only be protected but could easily be enriched by an environment where tariffs shake up other retailers.
Any move by retailers to stock up on inventory to avoid tariffs, for example, could ultimately enhance the off-price merchandise pipeline, as merchandise pile-ups often do. “This is what happened last time,” TJX Companies CEO Ernie Herrman told analysts last month, adding that “when there's chaos out there in the market ... usually, that's an opportunity for us.”
“That could create actually even additional availability of goods at advantageous prices for us because we can take advantage of that opportunistically,” he said. “And that's as likely a scenario as anything.”
Price competition
Any time mainstream retailers raise prices, for any reason, they sharpen an edge that off-pricers already have over them.
“Off-price is focused on maintaining a value gap to full-price retailers,” Bank of America’s Hutchinson and Nuñez wrote. “If full-price raises prices to combat tariffs and customers accept the increase, this would raise the ceiling for pricing at off-price retailers.”
Off-price retail executives made this clear during earnings calls following their Q3 reports in recent days.
“Our focus in the case of a tariff increase would be to maintain a pricing umbrella versus traditional retailers and offer the best values to the customer,” Michael Hartshorn, group president and chief operating officer at Ross Stores, told analysts. “We will not be a leader in raising prices.”
TJX’s Herrman echoed that.
“While we won't speculate on exactly what will happen with certain items or certain categories, if it does happen, we are set up to ensure that we maintain our value gap between us and the out the door at no matter what those categories are that could get hit with tariffs,” he said. “Everything is relative.”
To the extent that they are forced to grapple with any fallout from tariffs, off-price retailers tend to come from a strong position in the market. Herrman noted that TJX enjoys “flexibility that we're not buying so far early and out.” And Burlington plays hardball when it does, Wolfe said.
“As an off-price retailer with a flexible buying model, we do have the ability to negotiate the price we pay and to mitigate that impact [of any tariffs],” she said.
