Walmart (NYSE: WMT), Home Depot (NYSE: HD) split in response to tariffs

It’s a tale of two companies: Walmart (NYSE: WMT) has announced that US tariffs will force it to raise prices, while Home Depot (NYSE: HD) has announced that they won’t.

Dominick Reuter of Business Insider offers a cogent explanation for the divergent reactions of the two companies to tariffs. 

First, Home Depot has higher profit margins than Walmart, making it easier for the home-supply retailer to absorb the costs of sanctions. Home Depot registered a gross margin of 33% in the first quarter, compared to 24% for Walmart.

Second, Home Depot appears to have less reliance on China than Walmart does. Even after a recent reduction the US still has a 30% tariff on China, higher than for any other major trading partner. 

The latest available data show that Walmart obtained 60% of its imports from China in the January-August period of 2023. While Walmart already was shifting away from China at that point and has particularly emphasized India instead, the China number likely remains significant. Meanwhile, Home Depot says that a year from now, it expects no single company to account for more than 10% of its imports.

Leverage with suppliers

Also, Home Depot likely has more leverage with suppliers in getting them to absorb some of the tariff costs, Reuter notes. That’s because unlike Walmart, Home Depot has exclusive relationships with some brands, such as Milwaukee Tool, meaning their products aren’t sold elsewhere.

Thus those brands have incentives to keep their prices down, so that shoppers don’t turn to an alternative brand at a different store. Walmart sells largely the same brands that its competitors do, so there’s less incentive for those brands to give Walmart a better deal on pricing than Target (NYSE: TGT), for example.

Then there are groceries. That’s where 60% of Walmart’s sales come from. With consumers quite fed up with food-price inflation, there’s little room for the massive retailer to raise prices for food and beverages. So it must look at boosting prices of other products. Home Depot has more flexibility to shift costs, change prices or axe products, Reuter explains.

Others are doing it too

Walmart isn’t the only consumer goods company that has announced it will lift prices. Others include Best Buy (NYSE: BBY), AutoZone (NYSE: AZO), Hermes (CBOE: RMS) and Nintendo.

Financial advisers like to say that there aren’t universal rules for asset allocation – it all depends on an investor’s risk and return appetite. It’s similar for US companies and their responses to tariffs. Each company has its own calculus for deciding whether to raise prices in response to tariffs.

That calculus includes the ability to maintain sufficient profit without raising prices and customers’ willingness to accept price increases if they do occur.

One size doesn’t fit all.