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A bleak outlook for retailers with supply chain exposure to China in the face of preclusive tariffs took a minor positive turn on 12 May, at least temporarily, as US trade representatives agreed to slash its levies down from 145% to 30%, while China cut from 125% to 10%.

Treasury Secretary Scott Bessent said a “more fulsome agreement” is on the horizon, but for now, investors are asking what happens after the 90 day tariff pause.

Since 2 April, debt tied to companies with China exposure such as Kohl’s, Claire’s and Michaels have tumbled further into distress territory.

But brick and mortar stores have been grappling with headwinds long before Liberation Day. The so-called retail apocalypse kicked off by Amazon’s increasing dominance in recent years and a surge in online shopping, exacerbated more recently by inflation, lower post-Covid foot traffic and a poor economic outlook driving consumers’ toward cheaper alternatives.

Nevertheless, tariffs will have an impact. For retailers with China exposure, the prospect of 145% levies on imports may have been the trigger for companies and their creditors to advisor up. It was reported that Michaels, Claire’s and Gabe’s all brought in advisors to help stabilize messy corporate structures that were further complicated by the tariff tug of war.

"Tariffs are the tipping point, but the real issue are changing consumer sentiment and buying behavior,” said Kent Percy, partner and managing director on the Turnaround and Restructuring team at AlixPartners. “There are multiple disruption factors challenging retailers’ underlying operational business: e-commerce has been driving people out of stores for 20 years and Covid exacerbated that.”

Made in China

While the Trump administration knocked 115% off the tariff tally, 30% is still a substantial hike that will have a big impact on retailers, especially for apparel companies which are typically China dependent.

“For a lot of these retailers, hiring advisors were likely going to occur regardless,” Percy said. “The uncertainty of tariffs were the impetus and the need to plan for multiple scenarios just made it happen much faster.”

Michaels is especially susceptible given its supply chain exposure to China as it needs to contend with its $4.1bn debt stack, sources say. Michaels’ business exposure to China is less than half of its cost of goods sold, and with the lower tariffs in place, it does not have a near term liquidity crunch, according to a source.

Still, 30% duties will be cumbersome for Michaels, given the additional costs will be excessive compared to its around $600m LTM EBITDA as of 4Q 24, sources said. Lenders have grouped up with Davis Polk and Lazard on concerns stemming from the trade war and potential for a LME, 9fin reported.

The stakes of US-China negotiations are also high for Claire’s, Harbor Freight and At Home, which all source the majority of its products from China, according to a 9fin source and a Moody’s notes.

Elliott Management-backed Claire’s, the tween jewelry and accessories store, brought on Kirkland & Ellis and Alvarez & Marsal as it prepares to restructure its $502m TLB going current this December, 9fin reported last week.

Elliott Management declined to comment and Claire’s did not respond to requests for comment.

Meanwhile, Moody’s changed its outlook on Harbor Freight from positive to negative on its reliance on imported goods. For At Home, tariffs hit the home decor retailer long before Trump’s tariff war started. It may now be gearing up to file for bankruptcy, 9fin reported, on tariff pressure, an impending 2026 maturity of its ABL and high leverage.

At Home declined to comment.

Leslie’s, the swimming pool company and a longstanding watchlist name, saw its debt first drop out of the the 90s in February, reaching a 68.3 low on 7 April before rebounding slightly. In its most recent earnings, the company estimated $10m to $12m in product costs on tariffs, or roughly 1% of sales.

Leslie’s declined to comment.

Grill maker Traeger was hit by an S&P “negative” outlook on 14 May seeing as around 50% of its cost of goods sold has China exposure, with 80% of its grills supplied by China and the other 20% from Vietnam. Most of the company’s accessories are sourced outside of China, S&P added, but the company has ended up on the wrong side of Trump’s 25% tariff on products made from non-US steel and aluminum.

“Anything with four walls that has to compete with online consumers has been very challenged,” said Vincent Indelicato, global co-chair of the Restructuring Group at Proskauer. “Retailers facing supply chain disruptions may also have to navigate product shortages and empty shelves.”

Kohl’s, Michaels, Gabe’s, Harbor Freight and Traeger did not respond to requests for comment.

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