By Sabrina Escobar

Retailers and investors knew tariffs would be bad for the industry. They just didn't think they would be this bad, which is why the sector was heavily contributing to the market's decline Thursday.

Consumer discretionary was the second worst-performing sector Thursday afternoon, with a loss of 5.3%, The S&P 500 was off 3.7% as investors respond to the new tariff regime. The U.S. is setting a baseline 10% tariff on all imports, as well as so-called reciprocal rates for certain countries, which go as high as 50%.

Among the biggest shocks were the tariffs placed on Asian countries that make the bulk of consumer products. The list runs from apparel and footwear to furniture and consumer electronics. Shares of retailers in all those areas were sliding, but stocks of off-price chains and grocers gained ground.

In 2024, countries in the Association of Southeast Asian Nations accounted for roughly 26% of all textile and apparel imports to the U.S., according to data from the International Trade Administration. China accounted for 24% of imports.

The top five apparel and textile exporters -- China, Vietnam, India, Bangladesh, and Indonesia -- all got hit with tariff rates of more than 25%. China's reciprocal rate is 34%; Vietnam's, 46%; India's, 26%; Bangladesh's, 37%; and Indonesia's, 32%. When factoring in previously announced tariffs on China, the rate could be as high as 79% for some goods, although there is still some confusion on that number, even among administration officials.

Apparel makers shifted their production away from China following the wave of tariffs Trump placed on the country back in 2018. Heading into Wednesday's announcement, companies were banking on being able to move their supply chains again to less affected countries, and factored that assumption into their financial forecasts for fiscal 2025.

But the widespread nature of the reciprocal tariffs have "rendered these initiatives essentially fruitless," wrote a group of Jefferies analysts in a note Wednesday night.

In addition, consumers are extra sensitive to price increases after three years of inflation, making it hard for companies to offset the higher import costs by passing them on to consumers. "All footwear and apparel companies will see margins impacted as costs rise," the Jefferies analysts added.

The tariffs will also hurt furniture importers. China and Vietnam accounted for nearly 50% of total furniture imports in 2024, according to data from the U.S. International Trade Commission. Consumer electronics retailers will also be heavily hit given that most of the products they sell are produced in Asia.

That realization was weighing on the sector on Thursday. The SPDR S&P Retail ETF was down 7.2% Thursday afternoon. Five Below, Gap, Urban Outfitters, Kohl's, and Best Buy were the exchange-traded fund's biggest losers, with losses of more than 10%. Five Below plummeted as much as 29%.

Home-goods retailers Wayfair, Williams Sonoma, and RH were down 29%, 18%, and 42%, respectively. RH reported worse-than-expected earnings Wednesday afternoon, further clouding the outlook for furniture companies.

"Big-ticket categories like consumer electronics may see weakness, high tariff exposure will weigh on earnings, and business likely to see more share loss," wrote Citi analyst Steven Zaccone in a note Thursday downgrading Best Buy and RH to Neutral from Buy.

But as things typically go, one company's setback is another's opportunity. Some retail stocks were holding their ground as investors rallied behind companies they think can better navigate the uncertainty.

Off-pricers TJX and Ross Stores were faring better than most. TJX was up 1.3% and Ross Stores gains 0.6%. Off-price stores tend to buy out-of-season products from other retailers, rather than importing most of their merchandise themselves, which could reduce their tariff exposure. Plus, with apparel and footwear prices set to rise, full-price retailers will likely sell less clothing and shoes, so they may need to sell what is left to discounters, wrote UBS analyst Jay Sole. That would represent an opportunity for TJX and Ross to pick up desirable inventory.

TJX is a Barron's stock pick.

Grocers were also performing well. Shares of Kroger, BJ's Wholesale Club, and Albertsons all rose by more than 1.5%. As Barron's previously noted, grocers tend to import less from Asia. A good chunk of fresh produce comes from Mexico and Canada, but those countries were missing from Wednesday's announcement because they are subject to their own 25% tariffs. Goods compliant with the USMCA trade agreement are exempt from the levies.

Citi upgraded BJ's, TJX, and Ross to Buy from Neutral on Thursday, noting that all three were well positioned for the near term. Analyst Paul Lejuez noted that this was off-price's "time to shine."

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 03, 2025 12:18 ET (16:18 GMT)

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