For weeks, retailers have been bracing for what many have dubbed "Liberation Day"—President Donald Trump’s impending tariff announcement. The retail sector, already under financial strain, faces an uncertain future as the new tariffs could disrupt supply chains and squeeze profit margins. Investors, wary of higher import costs, have been avoiding consumer-discretionary stocks, sending shockwaves across the industry.

Retail has been a risky bet this year, with the SPDR S&P Retail ETF (XRT) plummeting by 11%, more than double the S&P 500’s 5% decline. Until there is clarity on the tariff situation, the sector will remain volatile. However, amid the turbulence, there are still opportunities for savvy investors.

Two Potential Tariff Scenarios

Trump is set to unveil the tariff details at 4 p.m. on Wednesday, with two possible approaches under consideration.

The first option is a blanket tariff that would apply a standard levy to all imports entering the U.S. The second is a more targeted approach, imposing reciprocal tariffs on countries that export more to the U.S. than they import. According to UBS economists, this could impact 15 to 20 of the U.S.'s key trade partners, covering approximately 75% of imports.

Regardless of the exact strategy, one thing is clear: tariffs are rising. A recent note from Morgan Stanley analysts emphasized the urgent need for companies to prepare for these changes.

Retailers’ Response: Mitigating the Damage

Retailers are already deploying various tactics to counteract the potential tariff impact. These include raising prices, renegotiating vendor contracts, diversifying supply chains, stockpiling inventory, and redirecting products to untaxed markets. Many companies had already begun reducing reliance on Chinese imports following Trump’s first-term tariffs, shifting production to Southeast Asia and Central America.

According to CFRA analyst Arun Sundaram, the industry is now better equipped to handle tariff hikes than it was in 2018. However, the impact is still expected to be significant. Morgan Stanley predicts a 13% average drop in fiscal 2025 earnings per share for hard-line and food retailers, while apparel companies could see an 18% decline. If additional tariffs are imposed, these losses could deepen further.

Uncertainty: The Real Threat

While the tariffs themselves pose a serious challenge, the uncertainty surrounding them may be even more damaging. According to Carey Kaufman, U.S. consumer strategist at Jefferies, the unpredictability of policy shifts makes it difficult for companies to plan, which depresses stock valuations. He notes that while betting against American consumers is usually a mistake, assuming they will continue spending at normal levels is equally risky.

Where to Invest Amid the Chaos

Investors looking to navigate this volatile landscape should seek out companies with minimal tariff exposure or those that can offset rising costs. Discount retailers like Ross Stores (ROST) are appealing, as they primarily source out-of-season products from domestic retailers rather than importing goods directly.

Big-box retailers like Walmart (WMT), Kroger, and BJ’s Wholesale Club may also be safer bets. Kroger, for instance, has limited exposure to Chinese imports and sources most of its fresh produce from Mexico and Canada. Walmart and BJ’s have strong negotiating power, allowing them to secure better pricing from suppliers.

Home improvement retailers may be another refuge. According to Evercore ISI analyst Greg Melich, companies like Sherwin-Williams and Home Depot (HD) are relatively insulated, as they cater to professional contractors who need supplies regardless of tariff changes.

The Apparel Industry’s Dilemma

Fashion and specialty retail face a tougher challenge. Apparel companies have fewer mitigation strategies since trends change quickly, making it difficult to stockpile inventory. Prices for clothing have historically declined, limiting their ability to pass tariff costs onto consumers. Additionally, many brands have shifted production to Vietnam, which may soon be hit with reciprocal tariffs.

Among apparel companies, Bath & Body Works and Levi Strauss are seen as the least vulnerable, as they do not heavily depend on China or Vietnam for their supply chains.

The Bigger Picture: Consumer Confidence at Risk

Even retailers with little exposure to imports could struggle if tariffs slow economic growth and reduce consumer spending. As government cuts and job losses mount, shoppers may become more cautious, further straining the retail sector.

Ultimately, the businesses that navigate this storm most effectively will be those with strong leadership and the ability to adapt quickly. For investors and retailers alike, the next few months will be a high-stakes gamble in an already uncertain economy.