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China trade conflict could disrupt holiday buying for retailers

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China trade conflict could disrupt holiday buying for retailers

An ongoing trade conflict between the United States and China could complicate the holiday season for retailers as they ramp up inventory for holiday shopping, industry experts said.

Even though the holiday shopping season is still months away, retailers have been making critical decisions about their holiday inventory since July, leading up to the peak ordering and shipping time of August and September. Retailers are keeping a close eye on Washington D.C. to gauge when — and how much — inventory they still need to order ahead of the holiday shopping season, several analysts said.

This year, retailers that source heavily from China face a difficult choice, A.T. Kearney analyst Johan Gott said in an interview. If retailers order too much too fast, they risk overstocking their inventory. If they wait too late, certain goods could be hit by up to a 25% tariff ahead of the critical holiday shopping season.

"We're really approaching a deadline here," Gott said. "Depending on what happens on the trade front, there's the potential for retailers to seriously misstep.

The U.S.'s largest retailers, including Walmart Inc., Home Depot Inc., eBay Inc. and Target Corp., posted rising sales in the later part of summer, even as the U.S. and China engaged in a tit-for-tat spat that could mean tariffs on retail goods like furniture, appliances and handbags. The largest batch of these tariffs — a proposed 25% tariff on $200 billion of Chinese imports — could be imposed as early as Sept. 6 when a public comment period ends.

Most finished consumer products have escaped tariffs so far, allowing retail companies to dodge a cut to their bottom lines. But planning for the holidays in the current climate will be tricky, analysts warned.

Target and eBay did not respond to multiple S&P Global Market Intelligence requests for comment. Walmart and Home Depot declined to comment on their holiday inventory plans.

There is already some evidence that retailers are ramping up their inventories earlier than normal, although it cannot be entirely pinned on looming tariffs. Retail imports set a monthly record in June, according to a National Retail Federation, or NRF, monthly report released Aug. 9.

The NRF, along with several analysts, said the uptick could be the result of retailers stocking up before tariffs take effect. Retail sales and consumer confidence, for example, are up, so retailers could be ordering more merchandise simply because they expect sales to be more robust, the analysts added.

"Certainly retailers will adjust their holiday orders in response to the fear of tariffs, and certainly imports are up compared to the same time last year," said Neil Stern, a partner at retail consultancy firm McMillan Doolittle, in an interview. "So I think we can safely attribute some of that increase to preemptive ordering before tariffs hit, but it's probably not the only factor."

Stern, along with Moody's retail analyst Charlie O'Shea, also noted that retailers are likely to boost orders of specific certain items targeted by the U.S. tariffs.

"Retailers are going to want to stock up on things like accessories, furniture and appliances from China before they have to either eat the extra duty or pass that along to consumers," O'Shea said in an interview. "It wouldn't surprise me if U.S. retailers are trying to order a bunch of those items before the tariffs are implemented."

Furniture imports — the largest category in the U.S. list of $200 billion Chinese imports potentially subject by up to a 25% duty — jumped 7.7% year over year in July, according to Panjiva Research, a division of S&P Global Market Intelligence. Meanwhile, apparel imports, which have not yet been targeted by U.S. tariffs on Chinese imports, grew more modestly over the same period. The category's imports increased 4.5% in July year over year, according to Panjiva.

The inventory pressure from tariffs comes a year after many retailers altered their holiday merchandise strategies, A.T. Kearney's Gott said. Last holiday season, some retailers kept tight control of their inventories, a move that widened margins and kept overhead costs low, he added.

Macy's Inc., one of the retailers that culled merchandise levels during the last holiday shopping period, said during an earnings call in February that the low inventory allowed for the retailer more flexibility in the beginning half of fiscal 2018 as the company avoided aggressive promotional sales and storage costs in the beginning of the year. Macy's did not respond to S&P Global Market Intelligence's request for comment.

"One of the big headlines of our performance right now is the fact that we have less carryover inventory as last season's goods and that gives us the opportunity to really respond to what's working in season, be that a hot vendor or a hot trend," said CEO and Chairman Jeffrey Gennette during the call with analysts.

Retailers will likely face significant pressure to keep inventory low in the coming year while also betting correctly on the timing and likelihood of consumer good tariffs, McMillan Doolittle's Stern said.

"It'll be quite the balancing act," he said.