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Trump's Threatened Tariffs Cloud Wal-Mart's Future


Wal-Mart enjoyed a strong fourth quarter thanks in part to digital sales growth. But potential border taxes could complicate business down the road.

Stymied by unforgiving exchange rates and the deflation of food prices, Wal-Mart missed fourth-quarter revenue expectations but saw its U.S. operations surge thanks to strong same-store sales growth and a thriving online marketplace.

The company faces uncertainty about its future financial prospects in America, however, as President Donald Trump's administration weighs tariff and tax policies that could raise prices for shoppers at the country's largest retail outfit.

Total revenue in Wal-Mart's fourth quarter – which ended on Jan. 31 – clocked in at $130.9 billion, up 1 percent from the same period in 2016 but ultimately shy of the $131.2 billion expected by analysts.

According to a readout of the Wal-Mart earnings call, Brett Biggs, the company's executive vice president and chief financial officer, cited "ongoing market deflation in food" as a hindrance to its grocery sales, noting that slumping prices "negatively impacted" its food business.

He also pointed to an "unfavorable $2.6 billion currency impact" exacerbated by America's strong dollar.

"It's important to note that currency impacts on net sales during the quarter were about $600 million higher than anticipated versus when we began the quarter, driven primarily by the depreciation of the Mexican peso versus the U.S. dollar," Biggs said.

Still, it's difficult to look at Wal-Mart's fourth-quarter earnings without noticing the company's thriving online sales business. E-commerce sales were up 29 percent during the quarter – bolstered by Wal-Mart's multibillion-dollar acquisition of digital marketplace Jet.com, which was completed in September.

Wal-Mart in recent years has invested heavily in its online offerings to better compete with the likes of Amazon. And since the turn of the new year, the company already has taken steps to strengthen its e-commerce portfolio by acquiring online shopping outfits like ShoeBuy and Moosejaw.

"There is a very clear and concerted effort by the business to transform its fortunes in online and to do this by acquiring capacity, talent and capability. This first became clear with the acquisition of Jet.com, which has now been joined by the takeover of the ShoeBuy and Moosejaw e-commerce propositions," Neil Saunders, managing director of GlobalData Retail, wrote in a research note Tuesday. "There is no denying that Wal-Mart did not flex its e-commerce muscles soon enough, but it is now working out [at a] very rapid pace."

Wal-Mart Company CEO Doug McMillon acknowledged as much during Tuesday's earnings call, noting that the company is "gaining traction and moving faster" in the e-commerce space.

But tax and tariff shakeups could muddy Wal-Mart's path forward, and Biggs noted that the company is "aware of and engaged in the discussions around tax reform in the U.S." Trump, for example, has floated the possibility of significant tariffs affecting imports into the U.S., particularly from Mexico and China, and his team has mentioned the possibility of a border-adjustment tax targeting imports.

"Consider Wal-Mart, which imports about $50 billion in goods each year from China," Brad McMillan, chief investment officer at Commonwealth Financial Network, wrote in a research note last month. "A 20 percent border tax would cost $10 billion per year – money that would either come from Wal-Mart's profits or (more likely) its customers' pockets in the form of higher prices. With Wal-Mart's sales at around $130 billion, that $10 billion would represent price increases of more than 7 percent."

Republicans in Congress have suggested that their tax plan – which also would involve a border-adjustment tax scheme expected to make imports more expensive while lightening the tax load for exports – wouldn't necessarily lead to higher prices in the long run, because the dollar's strength would increase further and essentially give Americans more buying power.

But as Wal-Mart's earnings report Tuesday indicated, a strong dollar and a weak peso aren't exactly good for its business. And some analysts still expect such a tax move would lead to higher prices for customers, at least initially.

Trump's administration has yet to fully weigh in on exactly what sort of tariff-and-trade policy it may pursue, though officials have mentioned the border-adjustment tax affecting Mexico and Trump repeatedly has called for a restructuring of the North American Free Trade Agreement – a move that in itself is expected to make exports from Mexico more expensive.

Of the border tax floated by the Trump team, McMillan wrote it "would hit the poorest Americans the hardest – in many cases, wiping out the past three years of wage growth in one shot."

"Looking at President Trump's policies so far, and assuming that he will continue to execute on his promises, we can very reasonably anticipate higher inflation, consequent faster increases in interest rates, and decreased consumer confidence as people find their cost of living rising faster than their wages," he said.

If prices at Wal-Mart get more expensive and it loses the low-price reputation it has garnered over the years, analysts expect the retail giant would need to make significant changes to remain competitive.

"So I think it's hard to imagine a Wal-Mart, which claims to have something better and fancier than anyone else, convincing people to buy the same goods at higher price," Tyler Cowen, a professor at George Mason University, said in an August discussion with Bloomberg. "I'm not saying they would go bankrupt the next day, but I think in the long run, a lot of what Wal-Mart does just wouldn't make sense."

Notably, Wal-Mart's McMillon in December was tapped to serve the Trump administration in an advisory role, which could provide him a direct opportunity to plead his company's case on trade issues.

Still, Trump has indicated he's willing to go his own way after receiving advice from his private-sector contacts. McMillon attended a meeting at the White House earlier this month at which some corporate executives expressed concern about Trump's controversial travel restrictions involving a group of seven Muslim-majority countries, according to Reuters. Trump this week is expected to unveil a new version of the travel restrictions after the first attempt was blocked in court.

In the end, tariffs on imports are unlikely to be great for business at big-name retailers like Wal-Mart, which employs 1.5 million American workers and accounts for 2.3 million jobs worldwide.

But Trump allies and globalization critics have argued net good could come by closing America's trade deficit, even if such a move generated winners and losers. The Economic Policy Institute – a left-leaning Washington-based think tank – published a study in 2015 that estimated Wal-Mart's business with China accounted for 15.3 percent of the growth in America's goods deficit with China between 2001 and 2013.

It also estimated trade with China eliminated or displaced more than 400,000 U.S. jobs over the same period.

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