Are The Shelves Stacked? How Tariffs Disrupt The Retail Business Model

Although it seems like there are many things that America doesn't get quite right—there's too much crime and too many drugs, to name a couple of examples—there is one thing that we do better than just about anyone else: shop.

We are the world champions in consumption, mainly due to an outstanding group of retailers that serve our every need. Names like Walmart, Target, and Home Depot provide us with the goods and products that are the envy of the world.

But it's not just their storefronts that are so impressive; it's the vast array of logistics support that allows us to place each of those products at our fingertips, constantly available and easily within our reach.

It's no accident that this incredibly intricate, marvelously coordinated retail system evolved. It took years of trial and error, and in the brutally efficient way of capitalism, not a few failures, to finally achieve today's state-of-the-art retail system.

At the heart of it all is the sourcing, the logistical system that brings the highest-quality products from the lowest-cost producers globally to stock those shelves. In the most recent cited numbers, Walmart was estimated to obtain 60-80% of all its products from China. Although that number is likely declining currently, it's safe to say that most Walmart goods still come from the Middle Kingdom.

And it's not an inconsequential number. According to Walmart's latest financial statement, it held $56 billion in inventory waiting to be sold. What's more, that inventory, those products and goods, will only sit on the shelves for about six weeks, after which you and I, the Walmart shoppers, will grab them.

Although the process is constant, you likely see the Walmart staff constantly restocking and replacing products. Economists view this process as an inventory replacement every month and a half—eight times a year, Walmart must replace and restock its $54 million inventory.

Imagine how demanding Walmart's constant inventory replacement is. The Walmart wholesale "buyers" must constantly circle the globe seeking to replace the inventory that Americans purchase daily from its over 10,000 locations.

Now visualize that those same Walmart wholesale buyers must purchase against the background of an uncertain Presidential Tariff Policy. At one point, President Trump indicated that he would slap a 145% Tariff on all Chinese goods entering this country, more than doubling Walmart's cost of goods.

Fortunately, the President has recently reduced the Chinese tariff to a "mere" 34%. For Washington, amending Executive Order # 14257, inserting "35%" instead of "145%," is a simple exercise, but it's an incredible headache for Walmart logistics and profitability.

https://www.whitehouse.gov/presidential-actions/2025/05/modifying-reciprocal-tariff-rates-to-reflect-discussions-with-the-peoples-republic-of-china/ Section 3

There are a couple of strategies that Walmart could use to mitigate the impact of these tariffs. They could, for instance, ship goods to a "Duty-Free Zone." This would allow them to avoid tariffs until they were shipped to their final destination. But this only works when Walmart can anticipate what the future Tariffs will be. Currently, the constantly changing tariff levels make any anticipation impossible.

However, there's more to this inventory issue than just logistics. Inventories are at the very heart of these massive retailers' financial structures.

For this example, we'll use Home Depot. All through 2024, Home Depot was my example of an overextended retailer that could find itself in trouble should the economy go south. However, I should also add that Home Depot is an extremely well-managed operation, and what was the case in 2024 no longer applies to Home Depot, although it may apply to other retailers.

In 2024, Home Depot had shareholders' equity of slightly over $1 billion, while the company carried nearly $21 billion in inventory. Here's the issue: If the "price" of that inventory should drop (be sold for less) by roughly 5%, the bank loans used to secure that inventory (inventory loans) would no longer be secure. The banks could call those loans.

You get the picture: $22 billion in loans secured by $21 billion in inventory and $1 billion in shareholders' equity. But if the inventory is now worth less (say $20 billion), then the shareholders' equity is wiped out, and the inventory loans no longer have adequate collateral.

Of course, this is an overly simple explanation, and there would be much more involved. Lawyers, investment bankers, and courts would all chime in, but this "worst-case" scenario can apply when inventory prices drop precipitously with an additional cost, like tariffs.

A final note: Home Depot has added another $5.6 billion in shareholder equity and is, from a financial perspective, a much different company than it was in 2024.

But you see the issue. For our major retailers, inventory represents a significant proportion of their balance sheet. Even for massive Walmart, inventory now at $56 billion is more than half of its shareholder equity, at $97 Billion.

So, when the President giggles at the Tariff numbers, he's not only adjusting the incoming price level of the goods and products we purchase, but he's also substantially adjusting the capital levels of some of the most important corporations in the country. Although we've used Walmart and Home Depot as examples, realize that many retail companies are not nearly as financially strong or resilient as these two. The retail sector should continue to feel the pain as the tariff wars continue.

Time Line

Perhaps the most frustrating aspect of these tariff wars will be the time it will take to discover the hard data many of us seek. While Wall Street may react instantaneously to every utterance of the President, the reality is that they're only guessing, projecting out what they believe will happen with little or no real data.

Here is my best approximation of the final data disclosure for the tariff impact. First, we are currently on a 90-day suspension. However, the Administration did not suspend all tariffs, only those proposed on April 2, Liberation Day. According to the Yale Budget Lab, the Administration has already raised the average US tariff level from roughly 2% to approximately 22.5%.

https://budgetlab.yale.edu/research/where-we-stand-fiscal-economic-and-distributional-effects-all-us-tariffs-enacted-2025-through-april

We expect to see some impact from tariffs beginning with this quarter's earnings reports.

However, we will not see the complete tariff impact until the 90-day pause is completed. Sometime in mid-August, the Liberation Day Tariffs will begin to take hold. So add another month or so to see those effects; that makes it mid-September.

The two most definitive reports on Tariffs will be the Census Bureau's September Retail Sales report, to be published on November 14, 2025, and Walmart's Fiscal Q3 2026 Earnings Report, published on November 20, 2025. Both reports will be broadcast before the markets open.

Stay tuned.