| | | Walmart, Costco, Dollar General early favorites to withstand the tariff hit as grocery wins over discretionary
Grocery chains are outperforming as Trump's reciprocal tariffs ravage the wider market.
With the S&P 500 ( ^GSPC) heading for its worst week since 2020, investors are looking for safe havens. In the last five days, shares of food-heavy retailers like Walmart ( WMT) and Costco ( COST) have stayed flat as the S&P 500 slid 7%.
UBS analyst Michael Lasser said the duo "have the most resilient earnings outlook" with tariffs expected to eat into the companies' margins.
"A greater amount of exposure to consumables products will see more earnings resiliency, especially grocers, given the vast majority of these products are sourced domestically," Lasser wrote in a note to clients.
Groceries account for roughly 60% of Walmart's US sales. The retailer says it domestically produces, assembles, or grows two-thirds of its goods sold in the US.
In Costco's last earnings call, CEO Ron Vachris said that one-third of its sales in the US are imported from other countries, with less than half of those coming from China, Mexico, and Canada. Most key food imports from Mexico and Canada were exempt from the latest round of tariffs.
Lasser pointed out Kroger ( KR) and Albertsons ( ACI) as two other companies that are "going to be viewed more favorably by the market." BJ's Wholesale Club ( BJ) has a 70% grocery mix and only a 3% exposure to China, per TD Cowen analyst Oliver Chen. Its shares are up 3% this week.
Wholesale clubs can also fare better in a tariff environment due to the buffer they get from membership revenue, Chen wrote in a note to clients.
Though shares of the five aforementioned grocers slid on Friday morning, all have dropped less than the S&P 500's near 5% decline on the day.
Size will play to Walmart and Costco's advantage.
"Scale really does come into play here in terms of who's going to win in this value orientation ... There's more of those stores. They're closer to more Americans," PwC US consumer markets adviser Ali Furman said.
The volume of their sales gives them leverage to negotiate with suppliers, which could widen their price gaps from competitors.
"As a general rule, and we've seen this across the board, suppliers will do what Walmart asks ... they can't afford not to. They can take a harder stance with smaller customers," said Maytee Pereira, US managing director of customs and international trade at PwC.
Retailers are now "dealing with the initial shock of of the magnitude of the tariffs" and going back to the supply chain to negotiate with vendors to share some of the costs, Pereira said. But their success will depend on their relationship with the supplier, the supplier's bandwidth, among other factors.
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