Off-price retailers aren’t too worried about tariffs

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The off-price retailer has another advantage over the competition: a certain level of protection against protectionism.

Tariffs were one of Donald Trump’s pet ideas during his presidential campaign, and he has continued to impose various levies on imports since his election victory last month. As a result, talk about the impact of tariffs on retail is increasing, even though the topic is fraught with uncertainty.

“Will Trump really impose 60% tariffs on goods from China and blanket 10% 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 on Monday. “Even in the case of milder tariffs, history shows that we can expect immediate, equivalent retaliatory tariffs. On this basis, the sooner a company can obtain the inputs it needs, the more cost-effective they will be, at least at a very basic level.”

Questions are now emerging on the latest earnings calls, with some retailers expressing uncertainty about what could happen. Lowe’s executives, for example, recently warned that despite some defensive measures taken after the first round of Trump tariffs, about 40% of the goods they sell continue to come from abroad and that they are preparing as best they can.

This is a big task.

“Managing inventory is a stressful task even in the best of times, but rising tariffs are making it even more difficult,” Wells Fargo economists said. “It sounds easy to stock up on everything you need, but at a time when inventory financing remains expensive, that’s an expensive solution.”

Several other economists and analysts also believe that the tariffs are likely to further increase inflation – which has been a major problem for consumers for several years.

But discount retailers tend to reject this for a few fundamental reasons.

The sourcing model

The nature of off-price retailers’ merchandise pipelines – where much of their inventory is sourced from retailers and brands that are shedding excess inventory – serves as a buffer against tariffs. According to analysts and the companies themselves, this may even give them an advantage.

“We believe off-price is relatively insulated from tariff risk given the low direct import risk,” Bank of America analysts Lorraine Hutchinson and Melanie Nuñez said in a Nov. 14 research note. “Off-Price sources its products primarily domestically and thus protects itself from directly incurring significant additional customs costs.”

Burlington, for example, will have imported about 8% of its goods directly this year, the vast majority from China, so “well over 90% of our purchases are of goods on which we do not pay the tariffs directly,” its chief financial officer Das said Kristin Wolfe told analysts last week.

Off-price players may not only be protected, but could easily be enriched in an environment where tariffs galvanize other retailers.

Any attempt by retailers to increase inventory to avoid tariffs, for example, could end up expanding the pipeline of goods at discounted prices, as is often the case with stockpiles. “This is the last time this happened,” TJX Companies CEO Ernie Herrman told analysts last month, adding: “When there’s chaos in the market … that’s usually an opportunity for us.”

“This could actually create even more availability of goods at advantageous prices for us because we can exploit that opportunistically,” he said. “And that’s as likely a scenario as anything else.”

Price competition

Every time mainstream retailers raise prices for any reason, they exacerbate the advantage that off-price retailers already have over them.

“Off-price is focused on maintaining a value gap with full-price retailers,” Bank of America’s Hutchinson and Nuñez wrote. “If full price raises prices to combat tariffs and customers accept the increase, it would raise the price ceiling in off-price retail.”

Off-price retail executives made this clear in recent days on earnings calls following their Q3 reports.

“Our focus in the event of a rate increase would be on maintaining a price umbrella versus traditional retailers and providing the best value to the customer,” Michael Hartshorn, group president and chief operating officer at Ross Stores, told analysts. “We will not be a leader in price increases.”

TJX’s Herrman echoed that.