Dollar General and Dollar Tree, two of the country’s best-known discount retail chains, warned Thursday that they can’t shield customers completely from higher prices fueled by new tariffs on Chinese imports.
The 25% duties on additional $300 billion in goods, which President Trump is exploring after more than doubling levies on $200 billion worth of merchandise following an impasse in trade talks with Beijing, would cover all of the imports from the world’s second-largest economy. While Trump has described himself as a “tariff man” and maintained the fees are a vital piece of his trade strategy, retailers, economists and some lawmakers have long warned they may hurt U.S. consumers and undermine the benefits of GOP-led tax cuts.
“Our shoppers will be facing higher prices as 2019 progresses,” John Garrett, the chief financial officer of Dollar General, told investors after the Goodlettsville, Tenn.-based chain reported earnings for the first three months of its fiscal year. “This is probably something that’s going to impact the customers.”
Duties in effect last quarter, including 25% surcharges on $50 billion of Chinese imports and 10% levies on $200 billion of shipments, have already pushed up consumer costs, and raising the 10% tariffs will only compound the effects, the company said.
The potential round of duties after that covers “the biggest impacted list,” said CEO Todd Vasos, and “I would have to assume the consumer is going to bear the brunt of some of this as well.”
[Related: ‘They have to stop’: Small businesses alarmed by new Trump tariff threat]
Dollar General, which operates more than 15,500 stores in 44 states, has worked to limit the impact of tariffs by negotiating with vendors, substituting lower-priced products and buying from other countries, executives said. Additionally, if the U.S. goes forward with new tariffs, the company may benefit from shoppers seeking a break from higher-priced competitors, Vasos noted.
“If this consumer is having to pay more across the board at every retailer because of these tariffs, we’ll stand ready to be able to — with open arms — take her in when she needs us most,” he said.
Dollar Tree, a key rival, has been able to shield its customers from much of the impact of the 25% tariffs decided upon so far, but the next round “will be impactful to our business and especially to consumers in general,” CEO Gary Philbin said Thursday. The Cheasapeake, Va.-based company operates more than 15,000 stores in 48 states, some under the Family Dollar brand.
It’s not only retailers who have struggled with fallout from Trump’s trade maneuvers. Across the American industrial landscape, the duties are eroding profit margins bolstered by the 2017 tax cuts, which slashed the top corporate rate to 21% from 35%.
The chances of profitability for S&P 500 members tumbling from a 2018 record to pre-tax cut levels or lower increased this week after Trump brushed off the possibility of a quick trade agreement with Chinese President Xi Jinping.
“We’re not ready for a trade deal,” Trump told reporters during a Monday news conference with Japanese Prime Minister Shinzō Abe, maintaining that Beijing regrets wavering on a potential agreement this month, which prompted an escalation in its trade fight with the U.S.
“We’re taking in tens of billions of dollars of tariffs, and that number could go up very, very substantially, very easily,” the president added, again chafing U.S. businesses, which pay the duties when their purchases arrive in ports, by implying that China picks up the tab.
Margins at S&P 500 firms dropped to an average 11.6% in the first three months of this year — down from a record high of 13% in the third quarter of 2018 before the duties took full effect, said David Bianco, chief investment officer for the Americas at DWS, the asset manager partially spun off from Deutsche Bank. That compares with an average 11.2% in 2017, the year before GOP-led tax cuts.
