Q2 Retail Earnings Preview: Demand in Question

When big-box U.S. retailers shared results in May, some said tariffs on imported goods would lead to price hikes. Others hesitated. Recent analysis found that over the last three months prices are up at some of the biggest box retailers. The next batch of earnings from major companies like Walmart (WMT), Target (TGT), and Best Buy (BBY) could help investors understand if sticker shock is something to worry about as back-to-school and holiday shopping seasons loom. 

In spring 2025, Walmart's executives promised higher prices due to trade policy, triggering a post from President Trump in which he told the company and its Chinese suppliers to "eat the tariffs." But that's a challenge for retailers, who by absorbing higher costs often suffer margin compression, which in turn damages earnings growth. Of course, passing costs along to customers presents another problem because they're likely to balk after four years of inflation. 

"If we see a restoration of dramatically higher tariff levels, the impact on our financials could be significant and even jeopardize our ability to grow earnings year over year," said John David Rainey, Walmart's chief financial officer, on the company's earnings call in May. 

To some extent, retailers have better clarity now on tariffs than they did then, though tariffs on China—the biggest supplier for many large stores—remain a work in progress. While two-thirds of what Walmart sells in the United States is made, assembled, or grown in the United States, the other third is made up of imported goods from China, Mexico, Vietnam, India, and Canada. 

"All of the tariffs create cost pressure for us, but the larger tariffs on China have the biggest impact," said Walmart CEO Douglas McMillon, also on the May earnings call. When tariffs on Chinese goods hit 145% briefly early in the trade war last spring, cost pressures accelerated for Walmart. 

Recent trade agreements with the European Union and Japan put U.S. tariffs at 15% for most goods, below the levels threatened by Trump in April but still high compared to the average U.S. tariff of around 3% a year ago. China and Canada—two of the countries McMillon mentioned—remain without deals, and the administration has made it clear that both are tough customers on negotiations. With this lack of clarity, investors might have to put up with more hazy guidance from the big retailers. 

A late-July CNBC survey of products sold at Walmart showed prices rose as much as 51% across apparel, electronics, toys, and groceries at one New Jersey location in the seven weeks leading up to that date. Many of the prices that rose were for products made in countries facing higher U.S. tariffs. Elsewhere, Amazon (AMZN) raised prices on 1,200 low-cost essential goods, The Wall Street Journal reported late last month. 

One question is whether the threat of increasing prices damages consumer confidence in what now looks like a tighter job market. The July U.S. nonfarm payrolls report showed slowing job growth and sent a chill through markets by subtracting 258,000 jobs that were previously reported as added in May and June. The revised figure showed jobs growth averaged just 35,000 over the May–July period, perhaps cooling customer demand. 

While the jobs and price picture present possible headwinds as earnings approach, there are signs that things have improved for shoppers since spring. 

"After sliding in May, retail sales bounced back in June, and alternative data like foot traffic and web visit data suggests continued resilience from the consumer, quarter to date," said Alex Coffey, senior trading strategist at Schwab, speaking before July retail sales data was released last Friday. "Consumer sentiment data from the Conference Board and the University of Michigan have shown signs of improvement in recent months as trade policy uncertainty has waned." 

One important thing to understand is that not all retailers are the same, and some currently face more challenges than others. 

"Retail is always a story of winners and losers," Coffey said. "This happens within products and brands. Furniture and home furnishings are showing signs of weakness, but discount department stores look to be trending strong. Another area of weakness is clothing and footwear. However, that doesn't mean specific brands within that segment can't show strength as Deckers (DECK) did recently within its UGG and HOKA brands." 

"Amazon dominates e-commerce in the United States and will be a barometer of consumer activity going forward as well as Walmart, Costco (COST), and to a lesser extent Target," Coffey added. "Dick's Sporting Goods (DKS) could be an interesting name to watch as school and fall sports kick off over the next few months." 

Amazon kicked off retail earnings in late July with 10% year-over-year sales growth at its online stores (on a constant currency basis). That was a dramatic improvement from 6% in that category a year earlier. Amazon emphasized "the biggest Prime Day event ever," though it didn't mention that Prime Day now takes place over several days. 

The company said it plans to expand same-day and next-day delivery to tens of millions of U.S. customers in smaller cities, towns, and rural areas by the end of this year. It has also launched generative AI tools to "enhance the shopping experience" and expanded its selection with brands like Away, Aveda, Marc Jacobs Fragrances, Milk Makeup, and Origins. 

"Our conviction that AI will change every customer experience is starting to play out," said Andy Jassy, president and CEO of Amazon, in the press release. On the company's call with analysts, however, Jassy added a note of caution, saying, "There continues to be a lot of noise about the impact that tariffs will have on retail prices and consumption…It's impossible to know what will happen." 

One question CEO Jassy posed is where will tariffs settle, especially with China, according to Amazon's earnings call transcript. Another is what happens when Amazon depletes the inventory it brought forward, or its selling partners who stocked up in advance of tariffs taking effect. "If costs end up being higher, who will absorb them?" Jassy asked. 

That's the $64,000 (or in Amazon's case, the $61.5 billion) question. It's a question that analysts will likely ask many retail firms when they hold earnings calls in coming weeks. Besides "eating" tariff costs or passing them along to customers, companies could reduce payouts to investors, something Whirlpool (WHR) stockholders learned to their chagrin late last month when the company cut its dividend. 

Asked on the earnings call how tariffs have affected Amazon so far, CEO Jassy said demand hasn't decreased, and there haven't been "any kind of broad scale ASP increases," meaning the average selling price. "And you know…that could change in the second half," he added. 

Uber (UBER), another large consumer-focused firm that reported earlier this month, also said it hasn't seen a drop in demand related to trade policy. 

Besides tariffs' potential impact, here are three things to watch as retailers report: 

• Home economics: The two biggest home improvement stores, Home Depot (HD) and Lowe's (LOW), both approach earnings on a roll in terms of share price—at least as of earlier this month. But will this translate into solid results? Lower Treasury yields have homebuilder stocks at their highest levels since January, and that plays into the home improvement retailers' rallies. So do an aging U.S. housing supply and improved supply chains. Headwinds, according to research firm CFRA, include pressure on large-ticket items requiring financing and a weaker "do it yourself" environment.
• Walk the walk: Footwear companies like Nike (NKE) and Foot Locker (FL) don't fit into the "big box," but they still command plenty of floor space on Wall Street when they report. Though shares of Nike rose after its last report in June, the question is whether there's any kind of turnaround developing in a soft shoe environment. Guidance from many footwear and apparel firms last quarter didn't impress, CFRA noted, and these products face slowing U.S. demand. One thing to keep an eye on is whether there are any write-offs from footwear and apparel companies for inventory and unusual costs.
• Margin call: Though S&P 500 profit margins overall remain healthy, wage and other cost pressures continue to hurt the retail sector, even as shoppers gravitate more toward lower-end products that don't necessarily support profit growth for these companies. That raises questions about margin growth and the outlook for profit improvement. Amazon appeared to disappoint investors with its forecast for third-quarter operating income of between $15.5 billion and $20.5 billion, compared with $17.4 billion a year earlier and Wall Street's $19.42 billion expectation. Other firms that could face margin pressure include those that sell home furnishings, personal care products, and packaged food (where costs are up due partly to demands from the Trump administration to change ingredient formulations). For big-box retailers and grocers, however, bargain-hunting consumers can help store traffic, especially at retailers offering low costs like Walmart and Dollar General (DG). And retailers' private-label brands can sometimes benefit as customers hunt for a cheaper basket at checkout. 

For the major retail firms reporting this week and next, analysts expect the following: 

WMT: EPS of $0.74, up 10.4% from a year earlier, on revenue of $176 billion, up 3.9% year over year 

TGT: EPS of $2.01, down 21.6% from a year earlier, on revenue of $24.9 billion, down 2.2% year over year   

BBY: EPS of $1.21, down 10.1% from a year earlier, on revenue of $9.2 billion, down 0.65% year over year  

HD: EPS of $4.72, up 2.6% from a year earlier, on revenue of $45.5 billion, up 5.3% year over year