Dive Brief:

• Recently announced tariff increases on Chinese imports could devour large chunks of operating profit from major retailers, with Floor & Decor, Bed Bath & Beyond, Target and RH (formerly Restoration Hardware) likely to be the "hardest hit," according to research by J.P. Morgan analysts.
• A new, separate round of tariffs now in process, which would cover many of the remaining imports from China, would hit Best Buy the hardest — taking its operating profit from positive to negative — followed by Dick's and Bed Bath & Beyond. For the purpose of their analysis, J.P. Morgan considered a "disaster" scenario where retailers could not rely on mitigation like supplier negotiation or pricing power to recover profits.
• Those retailers aren't alone. The proposed new tariffs, known as "tranche four," could eat 20% to 40% of the operating margin of a wide swath of retailers, including BJ's Wholesale, Michael's, Walmart, Target and Costco, according to the analysts. The hits to margins could send prices up 6% to 13% for the goods covered by the newly announced hikes ("tranche three") and 10% to 21% for tranche four goods, the analysts estimated.

Dive Insight:

Earlier this month, Macy's CEO Jeff Gennette called the proposed fourth tranche of tariffs "the big one." It would leave few products and few retailers untouched by steep levies as the Trump Administration tries to renegotiate the country's economic relationship with China.

Retailers would be affected by degrees by the new duties, but, as the J.P. Morgan analysts noted, "There is nowhere to fully hide, so it's a relative exposure game."

For example, Best Buy's operating profit would fall 168% in a vacuum, if it had no option but to eat the tax hikes, according to the J.P. Morgan team, which was led by analyst Christopher Horvers. That's largely because the electronics retailer sources half of its products from China.

"Ultimately, it boils down to demand elasticity, muscle over vendors, and pricing power," Horvers and his team wrote.

Auto parts retailers so far have been able to pass on price increases to customers, as the analysts note. There's a simple reason: Cars don't stop breaking down for trade wars. But customers can more easily skip buying electronics, apparel, footwear, toys and even larger discretionary products like home goods.

Moody's analysts in a report earlier this month pointed to apparel retailers that source heavily from China and sell largely in the U.S. as especially at risk. That would include G-III Apparel Group, which makes most of its revenue (86%) inside the U.S. and sources 61.5% of its products from China (which is actually down from 72% in 2017), the analysts note. Other brands with high reliance on Chinese manufacturing include Steve Madden, Oxford Industries and Chico's, according to B. Riley FBR analysts led by Susan Anderson.

G-III and others have been shifting production from China to other low-wage countries, such as Cambodia and Vietnam, the Moody's analysts noted. But costs could go up as those countries run into capacity shortages, as more brands and retailers pour business into them.