President Joe Biden (D-Delaware) could boost many American retailers with tariff reduction. In particular, Biden could help some lesser retailers such as Dollar Tree (DLTR), Best Buy (BBY), and Bed Bath & Beyond (BBBY) by reducing tariffs on some Chinese imports.
Biden’s administration could lift a narrow set of tariffs on some consumer goods, Politico speculates. I think, Biden wants to increase the supply of consumer goods to lower prices in time for the midterm Congressional and state elections in November 2022.
To explain, Biden could hope increasing the supply of consumer goods could limit inflation which is hurting Democrats’ electoral chances. America’s annual inflation rate rose to 8.6% for the 12 months ending in May 2022. This is the highest US inflation rate in 40 years.
Why Biden could cut Tariffs
Around 64% of Americans blame Biden for inflation, a June I&I/TIPP poll estimates. Hence, anything the administration does to lower prices could help Biden and Democrats politically. In particular, increasing the supplies of popular consumer goods such as electronics could lower prices and make consumers happier.
In 2019, former President Donald J. Trump (R-Florida) increased US tariffs on consumer and electronic products to 50%. Biden has not cut those tariffs even though many of the products are imports. The tariffs cover 99.7% of computer and electronic products, including phones, video games, and TV sets. The Peterson Institution for International Economics estimates.
Tariffs on other products, including apparel and accessories, are lower. For example, the tax on apparel and accessories fell to 7.4% and the tax on miscellaneous manufactured commodities on 59.6% in December 2019.
These taxes increase the prices of some popular items when inflation is soaring. Biden has little control over inflation, but he controls tariffs.
What Companies could Benefit from Tariff Reduction?
Tariff cuts could help some companies including electronics retailer Best Buy (NYSE: BBY).
For instance, UBS estimates Best Buy’s level of Chinese exposure at 50%. To explain, this means 50% of the stuff on Best Buy’s shelves comes from China. Best Buy has the highest level of Chinese exposure of the retailers UBS surveyed.
The next highest levels of Chinese exposure were at Wayfair (W) and Bed Bath & Beyond (BBY) at 40%. Williams Sonoma (WSM) had a Chinese exposure level of 35%, and Restoration Hardware (RH) had a Chinese exposure of 34%.
The biggest retailer with a high Chinese exposure was Dollar Tree (DLTR) which owns Family Dollar. Dollar Tree had a Chinese exposure of 30%. Another retail giant with high China exposure was Target (TGT) with 25%. Statista estimates Target was America’s seventh largest retailer in July 2021.
America’s largest retailer, Walmart (WMT) had a Chinese exposure of 20%. America’s fifth largest retailer Costco Wholesale (COST) had a Chinese exposure of 20%, UBS estimates. The fourth largest US retailer Home Depot (HD) had a Chinese exposure of 15%.
Could Tariff Reduction boost US Retail?
To see if tariffs are hurting US retail. I will sample the American retailer with the highest China exposure, Best Buy (BBY). Best Buy’s revenues, income and gross profit are collapsing.
For example, Best Buy’s quarterly revenues fell from $16.937 billion on 31 January 2021 to $10.647 billion on 31 March 2022. In comparison, Best Buy’s quarterly revenues fell from $11.637 billion on 30 April 2021 to $10.647 billion on 30 April 2022.
Stockrow estimates Best Buy’s revenues shrank by 3.38% in the quarter ending on 31 January 2022, 8.51% in the quarter ending on 31 March 2022, and 10.14% in the quarter ending on 30 April 2022.
Meanwhile, Best Buy’s quarterly gross profit fell from $3.543 billion on 31 January 2021 to $3.291 billion on 31 January 2022. The quarterly gross profit also fell from $2.689 billion on 30 April 2021 to $2.348 billion on 30 April 2022.
Finally, Best Buy’s quarterly operating income fell from $1.033 billion on 31 January 2021 to $803 million on 31 January 2022 to $462 million on 31 April 2022. Comparatively, Best Buy’s quarterly operating income was $769 million on 30 April 2021.
How Much Cash is Best Buy Generating?
Best Buy (BBY) is already burning cash to survive. Best Buy reported a quartering operating cash flow of $2.191 billion on 31 January 2022 that fell to $1.384 billion on 31 March and 30 April 2022. In comparison, Best Buy reported quarterly operating cash flows of $1.02 billion on 31 January 2021 and $105 million on 30 April 2021.
Moreover, Best Buy’s quarterly ending cash flow fell from $4.393 billion on 30 April 2021 to $960 million on 30 April 2022. Previously, the quarterly ending cash flow fell from $354 million on 31 January 2021 to -$433 million on 31 January 2022.
Frighteningly, Best Buy has far less cash. Best Buy’s cash and short-term investments fell from $5.494 billion on 31 January 2021 to $3.205 billion on 31 January 2022 and $640 million on 31 March 2022. Similarly, the cash short-term investments fell from $4.518 billion on 30 April 2021 to $960 million on 30 April 2022.
Best Buy Loses Value
Best Buy (NYSE: BBY) is losing value. Best Buy’s assets fell from $19.067 billion on 31 January 2021 to $17.504 billion on 31 January 2022. Furthermore, the Total Assets fell from $17.705 billion on 30 April 2021 to $15.251 billion on 30 April 2022.
In comparison, Best Buy’s total debt grew from $1.377 billion on 31 January 2021 to $3.938 billion on 31 January 2022. The total debt fell slightly to $3.942 billion on 31 April 2022. The total debt was $3.991 billion on 31 April, 2021.
Similarly, Best Buy’s stock price fell from $138 million on 22 November 2021 to $69.91 on 11 July 2022. Mr. Market thinks exposure to China is bad and invests accordingly.
Thus, Best Buy has less value, less cash, and more debt. It appears exposure to China can hurt retailers.
America Needs a New Trade Policy
In the final analysis, I think Americans need to rethink both the policy of outsourcing manufacturing to China and tariffs. I think Best Buy’s example shows dependency on China can hurt your business. Yet it also shows tariffs can hurt American companies.
America needs a better trade and industrial policy. Unfortunately, I see no evidence either Democrats or Republicans trying to implement such a policy. In particular, Biden has been in office for almost a year and a half, yet Trump’s imbecilic tariffs are still in force.
Worse, Politico speculates the Biden administration only wants to cut $10 billion of the $370 billion Trump tariffs. Disgustingly, some Biden officials such as US Trade Representative Katherine Tai and US Labor Secretary Marty Walsh want to keep Trump era tariffs in place to attract votes.
It appears America will be stuck with tariffs which will hurt retailers such as Best Buy (BBY) for the foreseeable future. Accordingly, I advise investors to seek stocks with low China exposure until America develops a sensible trade policy.
