Bernstein raises DG stock outlook on low tariff impact

On Friday, Bernstein analysts provided insights into the effects of the newly announced U.S. tariffs on the retail sector. The sweeping tariffs of 10% on all countries, declared by President Trump, are set to come into effect at 12:01 am ET on April 5. Additionally, the U.S. will implement reciprocal tariffs on several countries, including China at 34%, Vietnam at 46%, and the EU at 20%, starting at 12:01 am ET on April 9.

Dollar General (NYSE:DG) emerges as the least exposed to these tariffs, with approximately 4% direct import exposure. Walmart (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) follow, each with about a third of their cost of goods sold (COGS) being imported, directly and indirectly. According to InvestingPro data, Costco maintains robust operations with $264.09B in revenue and a "GREAT" financial health score, suggesting strong resilience to potential tariff impacts. The company’s current gross profit margin of 12.67% reflects its efficient cost management despite import challenges. On the other end of the spectrum, Target Corporation (NYSE:TGT) and Dollar Tree, Inc. (NASDAQ:DLTR) have the highest exposure, with each having around 50% direct and indirect import exposure. Home Depot (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) also face significant exposure, with 40-50% of their goods affected by tariffs.

The analysis indicates that among the countries facing tariffs higher than 10%, retailers have the greatest exposure to China. TGT and the DLTR banner are particularly vulnerable due to their substantial reliance on Chinese imports, especially in discretionary categories. Recalling the 2019 tariffs, TGT and DLTR each faced around 30-40 basis points gross margin headwind in the affected quarters. DLTR had mitigated 90% of the impact of the initial 10% Chinese tariffs but now anticipates an additional ~$20 million a month in incremental costs from an extra 10% tariff on Chinese goods and 25% on goods from Canada and Mexico. This could translate to approximately 140 basis points of gross margin impact if not offset.

Despite efforts by many retailers to diversify their supply chains away from China since 2019 and pushing suppliers to absorb additional costs, the new 34% tariffs may be too substantial to be fully absorbed. The diversification away from China could be negated by the higher tariffs on alternative sourcing countries.

The analysis also identifies China, the EU, Vietnam, Japan, South Korea, India, and the UK as problematic markets, with merchandise categories such as apparel, electronics, furniture, appliances, and alcoholic beverages being most affected by the new tariffs.

Overall, while all retailers will feel the impact of the tariffs, DG, WMT, and COST are seen as the most shielded from the effects. DG’s low import exposure distinguishes it from its peers, and WMT and COST’s lesser exposure and stronger bargaining power provide them an edge in dealing with suppliers. InvestingPro analysis reveals that Costco currently appears overvalued compared to its Fair Value, though it maintains strong fundamentals with a beta of 0.8, indicating lower volatility than the market. For deeper insights into Costco’s valuation and 14 additional exclusive ProTips, investors can access the comprehensive Pro Research Report, part of InvestingPro’s coverage of 1,400+ US equities. Moreover, as tariffs potentially elevate prices and constrain consumer spending power, WMT and dollar stores may benefit from customers seeking more affordable options. In times of economic uncertainty, investors may view WMT, COST, and DG as safer investment choices. Costco’s strong position is supported by its impressive revenue growth of 6.13% and consistent dividend payments for 22 consecutive years, as reported by InvestingPro. The company’s robust return on equity of 33% and healthy Altman Z-Score of 9.82 further reinforce its resilience in challenging market conditions.

In other recent news, Costco Wholesale has been actively navigating various challenges and opportunities. The company recently released its second quarter 2025 financial results, which exceeded consensus revenue estimates but fell short on profit margins and membership fee income. This prompted Bernstein analysts to raise their price target on Costco to $1,177, maintaining an Outperform rating, reflecting confidence in the company’s long-term prospects. Meanwhile, DA Davidson reiterated a Neutral rating with a $1,000 price target, highlighting Costco’s expansion efforts alongside competitors BJ’s and Sam’s Club.

Costco is also urging its suppliers in mainland China to lower prices in response to increased US tariffs, a move that aligns with efforts by other major retailers like Walmart. This comes as the US imposed additional tariffs on Chinese goods, impacting companies reliant on imports from China. Despite these challenges, Costco continues to expand its footprint, marked by the recent opening of its 900th club in Sharon, Massachusetts.

Citi analyst Paul Lejeuz revised Costco’s price target to $927 from $1,060, maintaining a Neutral rating, but noted optimism about the company’s business model. Lejeuz emphasized Costco’s focus on growing its membership base and incorporating data and technology advancements. The adjustments in price targets by analysts underscore varying expectations about Costco’s performance amid changing market conditions and geopolitical factors.

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