Walmart’s Inflation Shield from Trump’s Tariffs is Slowly Eroding

Will the tariffs imposed by President Donald Trump’s administration on the rest of the world destroy the American economy or will they merely fill the budget significantly? This remains a hot topic of debate among supporters and opponents of the current occupant of the White House. Both sides draw arguments that support their thesis, and recent quarterly results from Walmart have provided new fuel for the debate. As is well known to a large part of the public, Walmart is the largest American, and indeed global, retail chain, making its business a good indicator of the state of an economy that largely relies on personal consumption.

The second-quarter report showed that sales increased by five percent, leading to revenues rising to $177.4 billion, slightly better than analysts’ expectations of just over $176 billion. However, instead of the expected earnings per share of 74 cents, it stopped at 68 cents, marking the first disappointing profitability performance relative to expectations in the last three years. In the three months ending in July, the number of customers increased by 1.5 percent compared to the previous year, and the company even reported that customers spent twice as much time in stores compared to last year. Online sales also surged by a quarter. Foreign sales rose by 5.5 percent to $31 billion, driven by growth in its Chinese, Mexican, and Indian subsidiaries.

Consequences are absent. For now

While the business results of other American retailers have generally been mixed, Walmart’s financial report showed that this retailer does not feel the effects of the trade war. This is how Trump supporters would comment on the data. However, the other side, including more objective analysts who interpret the data with a grain of salt, believe that Walmart does not feel negative consequences, but only for now. After all, the company’s CEO Doug McMillon has indicated that troubles are on the horizon. In presenting the results to financial analysts, he noted that customers from households with middle or lower income levels are increasingly turning to cheaper products. In the group of higher-income customers, defined by Walmart as those earning at least $100,000 a year, such a trend is not observed.

The fact that sales have not yet fallen, but rather increased, is due to Walmart having stockpiled inventory before the tariffs took effect. However, as inventory is replenished, but now at higher prices due to tariffs, the company’s procurement costs are rising week by week, McMillon explained. This trend is expected to continue for the remainder of the year, he added. Chief Financial Officer John David Rainey revealed that prices have so far increased by 10 percent for imported goods, while the rest has managed to absorb the price shock. On average, overall prices at Walmart rose by one percent in the second quarter, emphasized the CFO. The leadership of this retail giant has stated that they will try to keep prices at current levels for as long as possible.

In this effort to contain the inflationary avalanche, it will greatly help that Walmart sources two-thirds of its goods from domestic suppliers, making it less sensitive to direct increases in the prices of imported goods compared to its competitors. Additionally, 60 percent of sales consist of groceries that are exempt from tariffs if imported from Canada and Mexico. However, it is worth noting that Walmart has previously publicly warned that tariffs, directly or indirectly, will result in higher prices in stores. In response, President Trump took to social media to tell the company’s leadership to ‘eat the tariffs’.

Rising procurement costs

However, it is more likely that the tariffs will eat away at entrepreneurs. A study by S&P Global published at the end of last week showed that input prices paid by American companies rose to the highest level in the last three months in July. As a key reason for this increase, local entrepreneurs point to tariffs. Walmart’s competitors also share the opinion that it is only a matter of time before American consumers encounter more expensive goods on the shelves. Major competitor Target just a day earlier reported diametrically opposed results in the form of a two percent drop in sales and nearly twenty percent profit. The cause of such results is that Target sources almost half of the goods on its shelves from imports.

Home Depot has also indicated that tariffs will soon begin to affect its pricing policy after announcing that its sales in the second quarter had already weakened by one percent. On the other hand, the company TJX, which owns the chains TJ Maxx, Marshalls, and HomeGoods, reported that it increased its inventory by 10 percent in the second quarter, which should suggest that it can withstand the pressure of higher procurement costs for a bit longer.

What will customers do?

Financial analysts emphasize that the ‘million-dollar question’ in the business of American retailers is how customers will behave in the future. Specifically, will they respond to more expensive goods due to tariffs by turning to cheaper brands without significantly reducing their purchase volume, or will they simply visit stores less frequently? Walmart’s leadership currently expects the first scenario, thus anticipating higher revenues due to slightly higher prices.

Instead of the previous three to four percent, the largest American retailer expects that sales will grow between 3.75 and 4.75 percent this year. This should also impact profitability, in the form of adjusted earnings per share of $2.52 to $2.62 instead of the previous $2.50 to $2.60. Despite the improved forecasts, the stock price fell by four percent after the results were announced. Although American business media attribute this decline to disappointment over lower quarterly profits, it may actually be a normal cooling off considering the stock price has risen by as much as 85 percent over the past year and a half.