What’s News in Earnings: Retailers Scramble to Respond to Tariffs

Summary

WSJ What’s News Episode: "What’s News in Earnings: Retailers Scramble to Respond to Tariffs"

Release Date: June 2, 2025
Host: Hannah Aaron Lange
Guest: Suzanne Kapner, Retail Industry Reporter, The Wall Street Journal

---

Introduction to the Earnings Season Focus: Retailers and Tariffs

In this episode of WSJ What’s News, host Hannah Aaron Lange delves into the challenges faced by major retailers amid the ongoing tariff war initiated by President Trump. The discussion centers around how companies like Macy's, Kohl's, and Best Buy are navigating supply chain disruptions, cost increases due to tariffs, and concerns over a potentially weakening economy affecting consumer spending.

---

Retailers' Strategic Responses to Tariffs

[01:48] Suzanne Kapner:
"Retailers have been working really hard to offset the impact of tariffs, mostly by diversifying their supply chains. They are moving production out of China into other lower tariff countries like Vietnam, Bangladesh. Some are even trying to move minimal production back to the US, but that's very small."

Suzanne Kapner explains that retailers are employing multiple strategies to mitigate the effects of tariffs:

• Diversifying Supply Chains: Shifting production from China to countries with lower tariffs such as Vietnam and Bangladesh.
• Reducing Dependency on China: Companies like Macy's have delayed or canceled orders from China, while Gap plans to double the amount of American-grown cotton it purchases.
• Negotiating with Suppliers: Seeking concessions to manage increased costs.
• Price Adjustments: Some retailers are considering or implementing price hikes to counteract tariff-induced expenses.

---

Impact on Pricing Strategies and Consumer Behavior

[02:29] Hannah Aaron Lange:
"A big question is whether retail companies will raise prices for customers on store shelves as a result of tariff-related costs."

[03:00] Suzanne Kapner:
"From Walmart to Ralph Lauren, companies are talking about price increases, but these are not across-the-board hikes. They are what companies describe as surgical."

Retailers are cautiously increasing prices on select items rather than applying uniform price hikes. This selective approach considers the price elasticity of different products:

• High-Demand Items: Products like handbags may see price increases due to their strong demand and pricing power.
• Commoditized Items: Items such as basic T-shirts are less likely to see price hikes to avoid diminishing demand.

Notable Exception:

• Gap: No current plans to raise prices significantly to maintain accessibility for middle-market consumers.

---

Supply Chain Fluctuations and Production Adjustments

[04:10] Suzanne Kapner:
"Retailers have had to change their strategies on a dime. When tariffs on Chinese imports fell from 145% to about 30% in May, companies rushed to resume shipments they had paused."

The volatile tariff environment has forced retailers to rapidly adapt:

• Shipment Management: Adjusting shipment timings based on fluctuating tariff rates.
• Cost Management: Pressuring suppliers to absorb some costs while trimming internal expenses.
• Production Shifts: For example, Gap reduced its production in China from 10% to 3% within a fiscal year despite tariff-related cost surprises impacting its financials.

---

Consumer Purchasing Patterns Amid Tariff Uncertainty

[05:34] Tony Spring, Macy's CEO:
"There is this mentality that I've got to buy something now. Maybe that's a part of some of the growth we've seen in fine jewelry, for instance." [05:49]

While some retailers like Macy's observe a pull-forward in consumer purchases of big-ticket items anticipating future price increases, the trend isn't universal:

• Macy's: Noted an increase in purchases of items like fine jewelry and furniture ahead of potential price hikes.
• Gap: Reported no significant stockpiling behavior among customers.

---

Diverging Consumer Behaviors and Economic Indicators

[07:06] Suzanne Kapner:
"A very bifurcated picture. The lower-end consumer has been under pressure... while higher-end consumers are seeing more full-price buying."

The retail sector reveals a "tale of two consumers":

• Affluent Consumers: Continue to spend freely, supporting high-end brands such as Ralph Lauren and Coach.
• Price-Sensitive Consumers: Lower-income shoppers at retailers like Target and Kohl's are restricting their spending due to economic pressures and increased costs.

Additionally, external factors such as DEI-related boycotts have impacted sales, notably at Target.

---

Future Outlook and Earnings Guidance Adjustments

[08:36] Suzanne Kapner:
"Retailers are being very cautious about the coming year and some have withheld guidance altogether due to tariff uncertainty."

Looking ahead to 2025, retailers exhibit prudence:

• Revised Earnings Guidance: Companies like Macy's and Abercrombie have reduced their profit or sales forecasts in response to anticipated continued tariff impacts.
• Tariff Uncertainty: Ongoing changes in U.S. trade policy add to the cautious outlook, with rising tariff costs expected to affect bottom lines later in the year.

---

Conclusion

The episode underscores the complex landscape retailers are navigating amid tariff-induced challenges. Strategies include diversifying supply chains, selective price adjustments, and adapting to shifting consumer behaviors. While affluent consumers maintain robust spending, price-sensitive segments are tightening their belts, signaling a bifurcated economic impact. Retail executives remain cautious, adjusting earnings forecasts in anticipation of sustained tariff-related pressures.

---

Production Credits:
Produced by Zoe Culkin and Anthony Banci, supervised by Michael Cosmidis. Additional sound courtesy of S&P Global Market Intelligence.

---

For more detailed analysis, listeners can explore related episodes, including a two-part series on the Target consumers boycott mentioned by Suzanne Kapner.

Transcript

[PGM Representative]

Unlock tomorrow's potential with PGM Active ETFs. Today, our ETF solutions meet investors evolving needs, leveraging 150 years of active investment experience and deep institutional knowledge across asset classes. With a diverse range of over 50 low cost ETFs, we help investors navigate today's changing market and position for the future. PGM Our investments shape tomorrow today. Visit [e-mail] ETFs hey listeners, it's Monday, June 2nd.

[Hannah Aaron Lange]

I'm Hannah Aaron Lange for the Wall Street Journal and this is what's News and Earnings, our look at the broad themes that stood out in the latest earnings season. Today we're taking a look at retailers. Stores like Macy's, Kohl's and Best Buy have been caught in the crosshairs of President Trump's tariff war. Executives are navigating supply chain disruptions and potential cost increases as a result of tariff policies, in addition to fielding concerns about American consumers and whether or not a weakening economy could shrink household budgets and eventually put a dent in sales. Though the complete impact of tariffs is yet to be determined, the policy is now facing legal challenges in federal courts. Many retail executives are scrambling to respond to the new landscape of global trade. To break down what we've learned from retailers in the first quarter, we're here with Suzanne Kapner. Suzanne writes about the retail industry for the Wall Street Journal here in New York. Suzanne, thanks for joining us today.

[Suzanne Kapner]

Thanks for having me.

[Hannah Aaron Lange]

So what did we hear from retailers about how they are responding to tariffs and the related challenges this earnings season? What stood out to you?

[Suzanne Kapner]

Well, retailers have been working really hard to offset the impact of tariffs, mostly by diversifying their supply chains. They are all mo production out of China into other lower tariff countries like Vietnam, Bangladesh. Some are even trying to move minimal production back to the US but that's very small. Macy's, for instance, said it had delayed or canceled some orders out of China. And Gap said they are actually planning to double the amount of American grown cotton it buys. So they're working with a variety of levers. They're also trying to wring some concessions out of their supply suppliers and some are looking at price increases.

[Hannah Aaron Lange]

That's one big question when we talk about retail earnings. Possibly a big question as retail customers as well who shop at these stores. Whether or not we're going to see retail companies raise prices for customers on store shelves as a result of tariff related costs. A few companies have already opted to do this. Walmart has said it plans to raise prices this month, maybe early this summer as well. Target has mentioned this might be on the table. What have other retail executives told us about what might happen with prices for shoppers?

[Suzanne Kapner]

Yeah, it's really been across the board. From Walmart to Ralph Lauren, companies are talking about price increases, but these are not across the board hikes. They are what companies describe as surgical. So they are looking at price elasticity of products and certain products maybe can bear an increase while others can't. They're afraid demand will dry up. If they raise prices, let's say on a T shirt that's like a very commoditized item, but maybe a handbag that is like, like hot and in demand, they have a little more pricing power. So this is the exercise. Companies are working on going through their inventory and seeing where they can raise prices where they can't. One notable exception is Gap which said they have no current plans to raise prices in any meaningful way. They're concerned that their consumer is a middle market, sort of moderate consumer and they don't want to price themselves out of their consumer's reach.

[Hannah Aaron Lange]

You've written about some of the different ways that retail businesses of all sizes have scrambled to respond to what can be a really rapidly shifting trade landscape. What are some of the different tactics that retailers are trying to adjust in response to all of these tariff related challenges?

[Suzanne Kapner]

Well, it's been such a fluctuating situation that retailers have had to change their strategies on a dime. You had some of them canceling or delaying shipments from China when tariffs were at 145% and instead relying on goods that they had already shipped into the US Then when we had that pause and tariffs on Chinese imports fell to about 30% in May, a lot of companies were rushing to get the shipments that they had paused into the US during this 90 day window. And they've been pressuring suppliers to eat some of the costs. They've been trimming their own costs to stay as lean as possible. The safest bet for these companies is just to continue shifting production out of China. Gap, for instance, at the end of their last physic fiscal year, which was February, they produced about 10% of their goods in China. Going forward, by the end of this current fiscal year that will be down to 3%. Nevertheless, GAAP really surprised the market when it said that the extra cost from tariffs would be about 300 million this fiscal year. Now they are able to offset about more than half of those. But analysts were really still surprised at the size of the tariff related costs and pushed Gap stock down quite a bit. So even though companies are really scrambling to mitigate, they could still get punished here.

[Hannah Aaron Lange]

It seems like all this talk of prices potentially going up is spurring some customers to rush to make purchases now. It's something Macy's CEO Tony Spring mentioned in the company's earnings call last week.

[Tony Spring]

There is this mentality that I've got to buy something now. Maybe that's a part of some of the growth we've seen in fine jewelry, for instance, maybe some of the big ticket areas where there's more uncertainty around the size of the impact of pricing changes that may come over the course of the year.

[Suzanne Kapner]

The truth is it's very hard for retailers to know exactly what is driving spending. And as Macy's CEO said, he thinks that there is some pull forward purchases of big ticket items like mattresses, furniture and jewelry ahead of possible tariff related price increases. But Gap, on the other hand, has said that it hasn't noticed any stockpiling at all. And I haven't heard too many companies say that they're seeing this pull forward buy.

[Hannah Aaron Lange]

I feel like this connects to another reason why investors pay such close attention to retail earnings in particular, which is that it can offer us clues about the economy and whether or not households are shopping less, maybe feeling strained financially. I know it's one reason why I pay attention to retail earnings. As a markets reporter, are retailers seeing signs of consumer distress? Is that something you heard frequently on the calls you're listening to? And how would you describe the health of the American consumer right now? Based on what we've been hearing, it's.

[Suzanne Kapner]

A very bifurcated picture. The lower end consumer has been under pressure now for several years since inflation started to spike up and any tariff related additional costs are just going to come on top of that. Target and Kohl's for instance, said their consumers are under pressure. They're being more choosy in what they buy. But at the higher end, like Ralph Lauren and Coach and some of these brands that appeal to more affluent consumers say they are seeing more full price buying by their customers, that their customers have an appetite to spend up. So you're really seeing the tale of two consumers, the wealthy and the less wealthy.

[Hannah Aaron Lange]

And the wealthy consumers are still spending.

[Suzanne Kapner]

The wealthy are still spending, yes. And the lower income are a bit strapped with Target and Kohl's. They've both kind of called out their consumers being under pressure. But it's also no coincidence that both those companies are struggling from their own missteps. For instance, had to deal with a boycott from its customers over its DEI programs that could have contributed to some of its sales weakness.

[Hannah Aaron Lange]

By the way, you can hear more about that Target consumers boycott that Suzanne mentioned in our special two episode series Boycotting Target. We'll leave a link to the series in the show. Notes so Suzanne, have any other major retailers gone so far as to cut or adjust their earnings guidance for the rest of the year? And what are we hearing from executives about what might lie ahead in 2025? Even as the details of US trade policy are still changing quite rapidly now.

[Suzanne Kapner]

Retailers are being very cautious about the coming year and some have withheld guidance altogether due to tariff uncertainty. Others like Macy's and Abercrombie have reduced their profit or sales guidance for the year. So there is definitely a tempering of expectations as the year progresses. A lot of them are expecting rising tariff related costs and that should hit them at the back end of the year.

[Hannah Aaron Lange]

Suzanne, thank you so much for coming on the show.

[Suzanne Kapner]

Thanks for having me. I appreciate it.

[Hannah Aaron Lange]

And that was what's News and Earnings. Today's show was produced by Zoe Culkin and Anthony Banci with supervising producer Michael Cosmidis. Additional sound courtesy of S and P Global Market Intelligence. Later today we'll have the PM edition of what's News out for you as usual. I'm Hannah Aaron Lange. Have a great day.

[Reba McEntire]

Isn't home where we all want to be? Reba here for realtor.com, the Pro's number one most trusted app. Finding a home is like dating. You're searching for the one. With over 500,000 new listings every month. You can find the one today. Download the realtor.com app cause you're nearly home. Make it real with realtor.com Pro's number.

[Hannah Aaron Lange]

One most trusted app based on August 2024 proprietary survey. Over 500,000 new listings every month based on average new for sale and rental listings February 2024 through January 2025.