Macy's (M) stock has given up much of its gains from a pre-market pop after management indicated tariff impacts still need to be addressed for guidance.
Shares of the Cincinnati-based department store were lower, wiping out their pre-market advance. Much of this was driven by macro sales data that came up short of bullish estimates, but downside momentum was also driven by the uncertain impact of tariffs not being figured into forward estimates from Macy's itself.
"This is a dynamic situation but let me give you a high-level view," CEO Jeff Gennette said. "The increase of the third tranche from 10% to 25% on does have some impact particularly on our furniture business. However, the team anticipates that this can be mitigated. If the potential fourth tranche of tariffs is placed on all Chinese imports that will have an impact on both our private and our national brands."
While he noted that tariff impacts from 2018 and small impacts on furniture were factored into guidance, impacts from the more recent escalation were not and could meaningfully change performance moving forward if tensions worsen.
"We are hopeful that trade talks between U.S. and China will continue productively and the trade actions between the two countries will deescalate," Gennette added.
That hope is pivotal to retailers like Macy's, as the Retail Industry Leaders Association, American Apparel & Footwear Association, and the National Retail Federation recently reported that 41% of clothing, 72% of footwear and 84% of travel goods sold in the U.S. are made in China.
The price increases on these hallmark goods sold by Macy's would either be eaten by the company and temper earnings estimates or would be passed onto the consumer.
With retail sales showing contraction in April, price increases would significantly affect demand for Macy's products.
"I think that we work very closely with our brand partners on that and in some cases think about what happened when we had the content staple changed and we had the apparel prices going up when that happened," Gennette explained. "There is a model on that about where are they are certain brands that can command a higher ticket and are there some commodities and that absolutely not you're going to return demand and you got to stay for price, either through a combination of you as a retailer or as a wholesale partners absorbing those increased costs. So, we're working through all that right now."
With margins already shrinking, passing on the cost to customers may be inevitable, which should hurt demand.
Progress So Far
To be sure, the company noted the progress it has made in mitigating tariffs so far, providing some optimism on the company's ability to navigate the dynamic trade environment.
"The first three tranches of tariffs that went into effect in 2018 and then the third tranche of tariffs that had an increase from 10% to 25% last week we're working through all those," Gennette said. "We have strategies to mitigate that. We think that those strategies will limit the customer concern and reaction to them."
While the details of the mitigation remain murky, the acknowledgement of a strategy is at least encouraging.
Still, it's really the last bucket that is promoting the stock price reaction.
"The big one is really if there is a fourth tranche that's put into effect," Gennette acknowledged. "The effect goes into effect it remains for $300 billion so it's going to affect a lot of the apparel and accessory categories that are coming in and what I'd say on that is that looking at all those categories and those brands that are included it is hard to do the math to find a path that gets you to a place where you don't have a customer impact."
He added that about 20% of goods sold in those buckets are currently being sourced from China and while the company has worked to move supply lines out of China, it is not a quick fix.
"It's still an important piece of our overall mix within China consolidating the amount of manufacturing partners that we have to improve our scalability and our power to negotiate there," Gennette told analysts. "We feel like we're going to be able to come up with solutions that work best for us and our brand partners. It's too early to comment on what we think that's going to mean in terms of potential price increases and what categories are going to be more affected than others."
The market never likes that kind of uncertainty and the price action is showing that ion Wednesday.