How Much Will Tariffs Hurt Walmart’s Profits?

Walmart Inc. (NYSE: WMT) management has warned that tariffs will hit a number of goods it sells in the United States. The world’s largest retailer imports much of its inventory from China. Prolonged tariffs could undermine Walmart’s financial results, and along with that its share price. This year’s holidays, so critical to retailer profits, may be rough for Walmart.

Over the past six months, Walmart shares are higher by about 9%, which is roughly the same as the S&P 500. Much of this is based on its strong results in the most recent quarter. Overall revenue rose 3.8% to $128 billion, compared to the same period a year ago. U.S. results were even more impressive. They rose 5.2% to $82.8 million.

While Walmart relies on much of its revenue from its International and Sam’s Club divisions, strong results from its U.S. division are essential to its success. Some Walmart sales rely very little on imports. This is particularly true of its large grocery business.

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According to a study by The Alliance for American Manufacturing and published in 2016:

In America, estimates say that Chinese suppliers make up 70-80 percent of Walmart’s merchandise, leaving less than 20 percent for American-made products. … If Walmart continues to grow at the same rate, in 2023 the company will spend just 3.2 percent on American-made goods.

A 10% to 15% increase in the prices of articles it imports from China could wipe out much of Walmart’s bottom line.

For American retailers, Walmart is just the tip of the iceberg. Thousands of retailers must be in a similar position because of their reliance on goods made in China.

Retailers make all their profits during the last quarter of every year. A rise in costs of imports during this critical period would have a brutal effect on many of them. That could be exactly what will happen this year.

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