Business Investing

Companies Are Adapting

I actually can’t guarantee this will be the last time I mention tariffs but I had to point out that in an earnings call on Friday, management for upscale home-furnishings retailer Restoration Hardware (RH) stated that alternative sourcing would reduce their dependency on goods from China down to 25-30% from its 2017 level of 40%. Management also was sure to say that the proposed 10% tariff on their goods from China would have virtually no impact on the company’s bottom line.

This is obviously good news for RH shareholders who pushed the stock up over 7% on Friday. I have to imagine the potential loser here is RH’s customers who may have to pay higher prices for goods coming out of China. I wonder if there really won’t be an impact on the bottom line or if sales will actually decline as a result of higher prices? Company management appeared fairly confident, which I suppose I would be too after beating earnings estimates by 30% last quarter. There’s a lot of ways this can play out including the following:

  1. Sales on goods coming out of China actually decline while sales volumes on other goods don’t grow sufficiently to offset the decline in Chinese goods, negatively impacting earnings;
  2. Sales volumes on all goods decline, negatively impacting earnings.
  3. Sales volumes on other higher margin goods increase to offset the drop in sales/margins on goods coming out of China with no net impact on earnings;
  4. RH raises prices on all goods modestly and is able to offset the lost margin on goods coming out of China, with no net impact on earnings;
  5. RH customers love RH products, aren’t price sensitive and continue buying them without hesitation, pushing earnings higher.

There are certainly far more potential outcomes than those I’ve suggested. I obviously don’t know how this will actually play out but RH is an example of a company that is looking for ways to reduce its dependency on China for goods. As of now, the company appears confident that it will be able to navigate the potential tariffs.

I continue to believe companies will figure out how to adapt if the tariffs actually go into effect. Whether all companies can avoid having their bottom lines negatively impacted is uncertain. I still think there is a greater than 50% probability the proposed tariffs don’t actually go into effect, or if they do they won’t be in effect long enough to make a meaningful impact on businesses and the economy. Time will tell.