A financial analyst breaks down why Trump's tariffs could be excruciating for Home Depot and Lowe's

  • Home Depot and Lowe’s will likely get pummelled if US President Donald Trump’s tariffs on Chinese goods get hiked from 10% to 25% at the start of 2019.
  • Seth Basham, the managing director of equity research at Wedbush Securities, told Business Insider that both retailers bear “significant exposure” to the tariffs.
  • The US-China trade war will also likely leave consumers feeling the pinch, potentially causing homeowners to put off renovation projects.

Home Depot and Lowe’s are in for a world of hurt if the US-China trade war escalates.

Business Insider recently spoke to Seth Basham, the managing director of equity research at Wedbush Securities, about how US President Donald Trump’s tariffs stand to impact the home-improvement powerhouses.

Back in September, Home Depot CFO Carol Tome told Fortune that the question of whether the tariffs would jump from $US34 billion to $US200 billion in products caused “a lot of volatility here in tariff world.” Tariffs did ultimately jump to the $US200 billion mark later that month.

Basham said he’s of the opinion that the tariff rate will likely jump from 10% to 25% in early 2019, and that they could end up encapsulating $US500 billion worth of Chinese goods.

And that’s not good news for Home Depot or Lowe’s.

“The bottom line is they are going to have trouble passing through all of the cost increases they incur,” Basham said.

Neither Home Depot nor Lowe’s responded to Business Insider’s request for comment. Basham said the result of tariff-driven costs could cause margin pressure or sales pressure for the companies, as they both currently have “significant exposure” to the tariffs.

Read more: Americans are pumping the brakes on home remodeling, and that might spell bad news for Home Depot and Lowe’s

He estimated that around 50% to 60% of the goods that the retailers import from China are on the tariff list. That means that 15% to 20% of their sales could be affected, according to his estimates.

Home Depot disputes that number – a spokesperson for the company said that the tariffs would impact 3.5% of its purchases.

“They have a few mitigation strategies that they’re working through,” Basham said. “One is to go back to their vendors in China and say, ‘Help us by giving us lower prices to off-set some of the tariffs.'”

According to Basham, other options would include seeking suppliers outside of China or renegotiating supplier contracts based on the change to the US dollar.

“As a last result, they will pass along cost increases in the form of higher prices to customers,” Basham said.

But it’s a two-way street when it comes to the tariffs’ impact on consumers and retailers. Basham said that the havoc wreaked on consumer spending power and the economy could also hurt Home Depot and Lowe’s.

“Consumers might pull back on doing discretionary home-improvement projects,” he said. “Because of the elasticity of demand associated with half the merchandise they sell, which I consider to be discretionary, you’ll probably lose some sales as a result.”

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