Tariffs Could Damp the Holidays For Retailers -- Who Will Be the Winners?

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Holiday-spending expectations are in and analysts are beginning to cite tariffs as a headwind to some retailers.

The tariffs are a major part -- although the not the entire story -- of why some retailers may falter while others show strength in the holiday season. And while this will certainly affect which companies are winners and losers for the holidays, the drivers of results could get a little murky.

For starters, the National Retail Federation is expecting holiday spend to come in at between $727 billion and $730 billion for November and December, a 3.8% to 4.2% increase over 2018's result. This would be an acceleration over 2018's growth rate of 2.1%, as the American consumer has been strong for all 2019.

Before we dive into winners and losers, let's get to the themes that could define this holiday season.

First, one analyst says highly discretionary retailers are likely to see reduced demand, as tariffs on imported goods from China prompt companies to raise prices.

"The tariff 'Grinch' will steal some holiday cheer," wrote CFRA analyst Camila Yanushevsky in a note. "Higher tariffs will mean higher prices for the U.S. consumer and, as such, we expect demand to be dented for more discretionary items like apparel, footwear, toys, appliances, furniture and consumer electronics." She also noted consumer confidence is at risk, given contradicting trade headlines.

And Yanushevsky's data show more consumer-staples-weighted companies and the lower-priced discretionary companies are seeing better online search trends. Search trends, according to most retail analysts, are often a reliable predictor of sales.

Walmart (WMT) - Get Report has seen holiday-related page views this year up 29% over 2018. Target (TGT) - Get Report has seen a 10% increase, Dollar General (DG) - Get Report  26%, and Dillards (DDS) - Get Report  a doubling.

Meanwhile, higher-end retailer Nordstrom (JWN) - Get Report has seen a 22% decline, while highly discretionary Ulta Beauty (ULTA) - Get Report and Williams-Sonoma (WSM) - Get Report saw 25% and 12% decreases, respectively.

Morgan Stanley takes a position similar to CFRA's.

"Elevated third-quarter inventory and tariff exposure leave us cautious about the soft-line holiday season," analyst Kimberly Greenberger wrote in a note. Soft lines, like clothing retailers, are mostly discretionary companies.

Greenberger is looking for just a 1.2% year-over-year increase in soft-line holiday sales. Among several reasons for the forecast: "List 3 and 4 tariff exposure add incremental cost-of-goods-sold pressure." Tariffs add costs and tighten gross margins, which is why companies raise prices.

Although she does not specify this is related to dented demand from tariffs, Greenberger favors off-price retailers.

Specifically, she favors Burlington (BURL) - Get Report and Five Below (FIVE) - Get Report . Greenberger also said "of holiday-exposed names, we have overweight ratings on Walmart, given its share gains in categories such as groceries." Walmart is a hard-line name and weighted mostly toward staples items. 

But parsing winners and losers for the holidays can also come down to China exposure, regardless of consumer-sector category.

"Companies with low sourcing exposure to China relative to peers will be more able to stay price competitive and will have a competitive advantage this holiday shopping season," wrote Yanushevsky.

She sees positive sales trends at Canada Goose (GOOS) - Get Report , even though it's highly discretionary. Canada Goose manufactures few goods from China and has recently been on a "Made in Canada initiative," investing heavily in plants there. 

Greenberger notes that "specialty retailers (Lululemon (LULU) - Get Report , Capri Holdings (CPRI) - Get Report , Tapestry (TPR) - Get Report ) currently source on average 24% of merchandise receipts from China." 

Away from the trade war altogether, one particular retail trend could be on full display for the holidays and could provide a meaningful lift to those companies that capture it. Bopis, or buy-online-pickup-in-store, may be key this season, as a tighter-than-usual period between Thanksgiving and Christmas might dissuade consumers from doing much brick-and-mortar shopping.

"With a last-minute time crunch this year, we expect sales generated from Bopis to reach new heights," Yanushevsky said.

Walmart has invested heavily in this type of initiative for its grocery business, adding to the thesis that Walmart could be a leading holiday season stock. 

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