Walmart resorts to price hikes as tariffs prove too costly to its bottom line

The news: Walmart shoppers could start seeing higher prices by the end of the month, as elevated tariffs challenge the retailer’s “everyday low prices” proposition.

• Even with the 90-day reduction in China tariffs, duties are “still too high,” CFO John David Rainey told CNBC, emphasizing that “the magnitude of these increases is more than any retailer can absorb. It’s more than any supplier can absorb.”
• CEO Doug McMillan was blunt on the company’s earnings call: “The higher tariffs will result in higher prices,” he said.

Alarm bells: The warning is particularly acute since Walmart is less exposed to imports than many of its peers and has more power to extract concessions from suppliers.

• While the majority of the groceries that it sells are sourced domestically, the cost of frequently purchased items like bananas, avocados, and coffee is rising due to across-the-board tariffs of 10% on all non-China imports.
• Most tariff pain will come in discretionary categories like toys and electronics, where Walmart is highly dependent on Chinese goods.

The company will absorb some of the tariff increases, particularly in categories such as food, to strengthen its appeal to cost-conscious shoppers and widen the value gap relative to competitors. It’s also reducing inventory orders in areas where it expects price hikes to dampen demand, curbing the use of tariff-impacted materials like steel and aluminum, and shifting production where it can.

But all of those tactics will eat away at profitability: Walmart declined to provide earnings guidance for the current quarter, although it kept its full-year forecast unchanged.

Silver linings: While tariffs are hurting Walmart’s bottom line, they also present an opportunity for the company to gain share. The retailer has historically done well in times of economic uncertainty thanks to its scale and ability to offer value for necessities like groceries.

• That was evident in Q1: Comparable sales excluding fuel rose 4.5% YoY for Walmart US, outpacing estimates for a 3.9% increase, while Sam’s Club grew by an impressive 6.7%.
• At the same time, consumers’ value-seeking behaviors were on full display. Shoppers spent more on necessities like groceries and prescriptions, and less on discretionary goods such as electronics and home products. Grocery private label penetration was up 60 basis points compared with last year.

Walmart also pointed to its ecommerce investments as an important buffer against volatility, noting that consumers increasingly value delivery speed and convenience. Walmart US’ ecommerce sales rose 21% in Q1, helped by faster delivery, marketplace expansion efforts, and its rapidly growing advertising business.

Our take: That Walmart, with its massive scale and ability to pressure suppliers into slashing costs, is warning of tariff-related price hikes shows just how damaging President Donald Trump’s expansive “Liberation Day” policies promise to be—for consumers as well as businesses.