00:00 Speaker A
The White House coming out moments ago to shut down reports of a 90-day pause on tariffs that exclude China. Those levies, of course, going to heavily impact the retail sector moving forward. Many big-name retailers have previously warned about the potential impact on prices. Best Buy, Target, Dollar General, and Abercrombie and Fitch, all saying they may be forced to pass on price hikes to consumers. Joining me now, Seth Basham, Wedbush Securities managing director of Equity Research for Retail Hardlines. Thank you so much for being here with us this morning, Seth. Really appreciate it. Talk to me about how you are thinking about the retail sector in this moment, and whether or not, I mean, are there any names that are not going to pass these prices on to consumers, or is that kind of an eventuality in your view?
01:05 Seth Basham
If the reciprocal tariffs stick, uh there’s inevitably going to be higher costs passed on to consumers in the form of higher prices. There’s no retailer out there that can withstand these higher costs and stay in business without passing some of them on to consumers.
01:42 Speaker A
So what are the, what are some of those names that have pricing power right now?
01:48 Seth Basham
In terms of pricing power within the hardlines group, some of the best companies include the auto parts retailers, AutoZone and O’Reilly Automotive as examples. And then some of the mass merchants who focus mostly on staples, like Walmart and Costco, would be other examples of companies that have the ability to pass on price most easily because they’re selling mostly non-discretionary goods, and their consumer tends to be mass market, uh or low income to some degree. Uh but you’re selling non-discretionary goods, and consumers have to buy those goods in order to continue their lives.
02:44 Speaker B
So what, so what do you reckon is the sort of impact on margins? It will obviously vary company by company, but give, give us a flavor of what this might do to some of the retailers’ margins. And, and presumably, once they hit, take the hit in year one, year two doesn’t have that much of an effect. There’s probably some working out of things, moving supply chains, and so on. Can you give us a feel for that?
03:17 Seth Basham
Yeah, it really will vary dramatically by company in terms of the examples that I just gave you. The auto parts retailers will see very minimal hit to margins. Uh they’ll be able to pass through almost all the higher costs in the form of, uh you know, gross profit dollars maintaining the same levels, gross margins coming in. Uh but EPS should not be hit too much. There’ll be a trade-down effect within the auto parts retail space where some consumers decide not to go out and buy new vehicles instead maintaining their existing vehicles, which helps support sales along with the higher prices from tariffs. So we expect a limited impact on profitability for those auto parts retailers. On the other extreme, if we see these tariffs stay in place, the more discretionary oriented retailers like the home furnishings retailers, the home improvement retailers, take a Home Depot, take a Williams-Sonoma, uh we could see a recession unfold, and we could see them uh not being able to pass through all the higher costs in the form of prices. So that we could see uh margins come under material pressure. You know, 200-plus basis points, earnings come down in the 10 to 20% range.
04:51 Speaker B
And, and, and as we know, Seth, markets move ahead and price in a lot of, often overpricing news. Are there opportunities brewing in those sectors the hardest hit? Would, would you be thinking about picking up some of those stocks, nibbling on them?
05:19 Seth Basham
Absolutely. Uh today, we recommended investors scoop up RH, Restoration Hardware. That stock has been decimated since the announcement of reciprocal tariffs in their fourth quarter earnings report. They have high exposure to Southeast Asia, where the tariffs are severe. Uh but we think their more likely scenario is that this is a negotiating tactic for Trump, and we’ll see those ta tariffs dialed back uh or eliminated when this is all said and done, which really creates a solid footing for the earnings power of RH, and discount on the stock today.
06:06 Speaker A
All right, Seth. Thank you so much. Appreciate it.
06:11 Seth Basham
You bet.