By Thomas J. Ryan
<span style="color: #999999;">With a fresh round of tariffs arriving on September 1 and another scheduled to land December 15, tariff-mitigation strategies were again widely discussed by vendors on recent quarterly conference calls. So far, the impact has been largely minimal for most with more concerns expressed about 2020.
The following are some comments:
Columbia Sportswear on its third-quarter conference call (October 31) said the company received the majority of its fall 2019 product prior to the September 1st tariff increase, resulting in minimal financial impact to 2019.
Tim Boyle, president and CEO, also said the company’s “diversified supplier base is a competitive strength” and credited Columbia’s sourcing team for its ability to mitigate tariff costs. He said, “We have a really excellent team here, and they’re focused on modifications that can be made in garments as well as the location of manufacturing, et cetera. But nobody can really predict in the capricious nature of these tariffs impacts when we can’t predict in advance where or when it’s going to happen. So, once they happen, we feel comfortable being able to, with our diverse source base and our expertise in tariffs, do what we can, but this environment is quite difficult.”
When assessing the impact of tariffs on 2020, Boyle noted that nearly 40 percent of Columbia’s sales are outside the U.S. and are not directly impacted by the U.S.-China trade battle. Based on projected 2020 production, base products sourced in China for the U.S. market are expected to represent a low double-digit percentage of the total estimated imported value. Columbia is actively working to mitigate that financial impact.
Boyle nonetheless railed against the use of tariffs as a trade tool. He said, “Looking beyond the direct impact to Columbia, we believe escalating trade battles globally are disruptive for American businesses, bad for the global economy and costly for consumers. In an industry that already suffers from punitive tariffs, some as high as 37.5 percent, adding additional taxes on our products places an undue burden on consumers and employers furthermore, raising tariffs in a capricious manner creates uncertainty for business which discourages investment. History has shown the cost of these tariffs is borne by U.S. consumers.”
Vista Outdoor on its third-quarter conference call (November 7) reiterated that it expects a full-year impact from tariffs in the range of $15 million to $20 million, or about 5 cents a share. Roughly two-thirds are expected to be mitigated by the company.
The year-over-year decrease of 7 percent on an organic basis in the Outdoor Products segment was also largely attributed to the impact of tariffs. Major brands in the segment include Bushnell, CamelBak, Camp Chef, Primos, Bell, and Giro.
“The ongoing trade dispute between the United States and China has created countless challenges for our entire organization,” said Chris Metz, CEO, on the call. He noted that in some product categories, more than 90 percent of global production capacity is in China so relocating sourcing “is not feasible or even a realistic business strategy in the short-term.”
Vista has laid out three focus areas that guide mitigation actions. The first is vendor cost reductions and/or value engineering that has secured many cost reductions or efficiencies from suppliers.
The second is finding sources outside of China. Said Metz, “Despite the monumental task of relocating production on short notice, we have begun to diversify our supply chain away from China.”
Last, implementing price increases with the support from retail partners. Said Metz,” This has been a delicate step as we typically drive pricing based on market demands, but tariffs have forced our hands in some instances. For example, tariff-induced price increases at Camp Chef have negatively impacted the results leading to reduced sales, profitability and American jobs. As the trade war continues, we will continue to fine-tune our pricing strategies to minimize the impact.”
VF Corp. on its second-quarter conference call (October 25) said several factors—foreign-currency headwinds, tariffs and the disruption in Hong Kong—would negatively impact its fiscal 2020 earnings outlook by about 7 cents a share. V.F.’s chairman, President and CEO, Steve Rendle, said, “While all of the items just mentioned are small individually, collectively, they are weighing on our opportunities for upside performance for the remainder of fiscal 2020.”
The parent of The North Face and Vans still reaffirmed its EPS guidance for its fiscal year ending March 2020 due to ongoing momentum in the business.
Scott Roe, VF’s CFO, said tariffs on China goods shouldn’t be an issue going forward as about 7 percent of its sourcing came from China for this year, and that’s expected to decline to approximately 4 percent next year. Said Roe, “Unless there’s another tweet or another series of tariffs that come in, you shouldn’t expect much from an ongoing basis relative to tariffs.”
Nike on its first-quarter conference call (September 24) indicated that tariffs would impact gross margins from its second-quarter through its fourth quarter with the impact “more pronounced” in the second quarter.
Nike nonetheless raised its projection for gross margins for FY20 to an expansion within the 50-to-75 basis point range, versus previous guidance calling for margin improvement of 50 basis points. The implemented tariffs and the “more intense FX headwinds of late associated with trade dynamics,” are expected to be offset by an improving outlook for currency-neutral growth.
Mark Parker, Nike’s chairman, president and CEO, said on the call, “We’ve been clear that we strongly believe in the power of free and fair trade. Historically, we’ve effectively navigated through excessive duties, and we’re confident that we’ll continue to do so under the current dynamic.”
Parker added that with List 4 tariffs announced in August and implemented in September, Nike didn’t have “much time to manage any of the levers” it has used in the past to mitigate tariffs for the current quarter. But he suspects the company will be able to tap more over the course of the year. Said Parker, “We’re a big proponent of free and fair trade and that’s because tariffs have always been part of the financial equation in Nike, so with a little bit of time, we have a lot of levers we can work with from sourcing to other levers. So, the impact of tariffs is most significant in Q2. And then, as you likely inferred from our guidance, we expect slightly greater gross margin expansion in Q3 and Q4 as compared to Q2.”
Wolverine World Wide on its third-quarter conference call (November 7) said it expects about an impact of $3 million, or 3 cents a share, from the new tariffs in the fourth quarter. Adjusted EPS guidance for the year was lowered to approximately $2.25 from $2.28 previously.
Helping mitigate the impact of tariff costs was bringing in some products early before the tariffs became effective.
Blake Krueger, chairman, CEO and president, also said Wolverine’s sourcing team for several years had focused on shifting away from China production to mitigate long-term exposure and that’s helping offset tariffs. Overall imports into the U.S. from China are projected to decrease by an additional 50 percent in 2020 and continue to decrease at that rate in 2021.
Said Krueger, “For 2020, we continue to develop our mitigation strategy to offset these new costs and expect to neutralize the future impact through negotiated product cost reductions, some wholesale price increases, new product introductions, and further supply chain improvements.”
He said the company is finding that migrating out of China “adds a little bit to lead times” but production costs have gone down. Krueger expects selective price increases, some lower prices negotiated from contractors and supply-chain efficiencies to offset much of the tariff costs in 2020. Krueger added, “We don’t know what’s in front of us. It can change, but we’ve been very proactive here to kind of neutralize those costs for 2020.”
Skechers said on its third-quarter conference call (October 22) that domestic gross wholesale margins in the quarter were lower year-over-year due to increases in the average cost per unit, which were partly attributable to increased tariffs becoming effective during the quarter. But overall gross margin increased 30 basis points, ahead of plan, primarily due to margin expansion in its healthy-growing international businesses.
Gross margins are expected to be flat-to-down slightly in the fourth quarter due to the tariffs. John Vandemore, CFO, said, “We are still absorbing the impact of the first round of 4A tariffs. We have put in place mitigation efforts, those are ongoing. We’ve made some decisions to absorb certain elements of the increase in the short term to the benefit of our customers.”
Strength in its international and DTC businesses are also expected to help offset margin pressures at domestic wholesale.
Vandemore added that the company is being “a little bit conservative” on its guidance on domestic wholesale margins due to uncertainty around the implementation of tariffs. But the company has been “very aggressive” in pursuing its three core remediation strategies: finding alternative sourcing, securing vendor concession and making price adjustments. Said the CFO, “All those efforts are underway, and we think long-term, probably after the first quarter of 2020 perhaps, that this really becomes a mitigating effect. We’ll, obviously, be working to make that happen sooner, but that’s the efforts we put into place today.”
Deckers Brands said on its second-quarter conference call (October 24) that it believes it has taken the necessary steps to mitigate “any material impact” from tariffs in the current fiscal year 2020.
Said Steve Fasching, CFO, “We are continuing to assess the impact of tariff policy decisions going forward. As there still a lot of factors to work through, we are not yet providing an estimate on the impact beyond fiscal year 2020. We are evaluating options that can potentially offset these increased costs including considerations of pricing power within our brands as well as continuing conversations with our suppliers who are willing to work with us.”
Fasching noted that less than 20 percent of Deckers’ current global production comes from China and is shipped to the U.S.
Clarus Corp.,on its third-quarter conference call (November 5) reported another quarter of double-digit gains for its flagship Black Diamond brand but weakness at Sierra Bullets on top of the strengthening U.S. dollar and an escalating trade war caused the company to cut its guidance for the full year.
Overall, tariff escalations, as well as the unfavorable movement in foreign currency, impacted third-quarter adjusted EBITDA by $1.1 million. Clarus said it continues to focus on four primary mitigating activities: re-costing, resourcing, repricing, and optimizing logistics to bypass the U.S. on international shipments.
“We view these headwinds as transitory,” said John Walbrecht, Clarus’ president. “And, most importantly, we believe our brands are better positioned for growth than they have ever been. Our commitment to innovation is fueling new and more disruptive products that are being well received by our retail partners as well as recognized by trade publications.”
Under Armour on its third-quarter conference call (November 4) said only about 10 percent of its product that comes into the U.S. is now sourced out of China.
David Bergman, CFO, said on the call, “Right now, we’re in a very good position. We’ve been very proactive starting years back and mitigating the amount that we import into the U.S. from China. So, we feel pretty good about that. Relative to all the enacted tariff policies that are out there with List 3 and List 4A and 4B, all of that’s considered in our outlook, and we feel like we’re in a really good spot. So, we’re working with our vendors and continue to drive forward in our sourcing strategy. But we’re well prepared for it.”
Crocs said on its third-quarter conference call (October 30) that the tariff impact is immaterial for this year and “really not material” for 2020, according to Anne Mehlman, EVP and CFO. Mehlman added, “What we see is that less than 10 percent of our product, our U.S. product, will be sourced from China. So we don’t foresee at this level that tariffs will have an impact on our business. So that should be able to clear that up.”
Callaway Golf said on its third-quarter conference call (October 31) that the current impact of tariffs is expected to be approximately $3.5 million for FY19 and $7.5 million in FY20. The impacts were included in guidance and the golf-equipment manufacturer reconfirmed its earnings guidance for the year. The tariff impact included a 25 percent tariff on headwear, bags and other soft goods with the List 3 tariffs and a 15 percent tariff on apparel, footwear and golf equipment with the List 4 tariffs. After 2020, Callaway Golf said it expects its sourcing to be fully diversified with no material effect from such tariffs. Said Brian Lynch, CFO, “Our operations team has done an excellent job in diversifying our supply chain outside of China and thereby mitigating our exposure to these tariffs.”
Acushnet Holdings, the parent of Titleist, said on its third-quarter conference all (November 3) that it continues to expect an impact from tariffs in the range of $7 million to $10 million from the arrival of List 4. Said Tom Pacheco, CFO, “We have been taking steps to mitigate, including negotiating price concessions with some of our vendors. We’ve shifted some of our supply and sourcing outside of China. We’ve been looking at strategic pricing actions. And we certainly think, we will be able to mitigate a significant portion of that $7 million to $10 million.”
G-III Apparel on its third-quarter conference call (September 5) estimated the fourth tranche of tariffs will cost the company approximately $12 million for the current fiscal year ending January 31, 2020.
Morris Goldfarb, CEO and chairman, said that as the risk of tariffs have increased over the past six months, G-III Apparel has accelerated inventory receipts from suppliers that have raised inventory balances in the quarter. Inventories were up 24 percent at the quarter’s end.
Goldfarb added, “I just recently met with several of our largest Chinese vendors who continue to be extremely supportive in sharing the tariff cost implemented today. Our ability to accelerate inventory receipts, as well as obtain vendor support are expected to minimize the impact of tariffs on our financial results for this fiscal year. Looking ahead to next year, while the effect of trade negotiations and tariffs between the U.S. and China remains uncertain, we expect to be able to mitigate the impact of tariffs through continued expansion of our sourcing alternatives obtaining further price concessions from our vendor partners in China and implementing selective wholesale price increases where we deem appropriate.”
