There were two types of retailers at the start of 2019.

Tariff list three, the first to significantly impact consumer products, was levied at 10% and the Trump Administration delayed a planned increase to 25%. It was after that delay that the two types revealed themselves. Retailers either waited to see what would happen with the increasingly sunny negotiating parties in the new year, or prepared for the worst.

In this context, “prepared for the worst” means planning for a jump to 25% tariffs on list three in the first quarter.  Williams-Sonoma prepared for the worst.

When List three did go up to 25% from 10% on May 10, the home goods and furniture retailer behind Pottery Barn, West Elm, Mark and Graham and Rejuvenation had been rerouting its supply chain for months and with good reason.

Fail to prepare and prepare to fail

The threat was clear. JPMorgan estimated Williams-Sonoma would need to raise prices 7% to absorb 25% tariffs on list three. And based on the same analysis, with no mediation efforts, the retailer would lose 12% of its operating margin. With the addition of list four, an 11% price increase would be needed to cover the 10% tariff leading to a 7% hit on operating margin. The cumulative hit from the two rounds would be 19% according to JPMorgan.   

At the end of 2018, the company had already begun what CEO Laura Alber called "aggressive" work to mitigate tariffs. Among these tactics were reducing overhead costs like janitorial services, utility bills and data processing fees to bolster operating margin.

Alber touted a diverse supplier base on her November 2018 earnings call, but as JPMorgan estimated, one-fifth of Williams-Sonoma’s total assortment came from China (15% on list three) so direct mitigation work was also necessary. "We are looking to mitigate every dollar next year of the possible tariff risks," Alber said on the same call.

Price increases, supplier negotiations and consolidating contracts to ensure there were no extra middlemen skimming from Williams-Sonoma’s margin, all went into high gear. The company opened an upholstery factory in Tupelo, Mississippi — hiring 500 workers in a rare example of President Trump’s trade policy driving manufacturing back to the U.S.

The result? By 2020, Williams-Sonoma will have halved its China sourcing, CFO Julie Whalen announced in June.  

But does preparation lead to profit?

In the first two quarters of 2019, Williams-Sonoma increased its operating margin, if slightly, and held the figure steady in Q3. The retailer raised the low end of its revenue guidance for fiscal year 2019 three times— while also reducing promotions and markdowns to preserve margins. Gross profit in the second quarter was up 4.7% year-over-year — up 4% for the first three quarters.

The company brought in “as much inventory as possible” ahead of the list four tariffs, which the administration split into two implementation dates — Sept. 1 and Dec. 15. And by the end of the third quarter, Alber explained to analysts that with next to no un-tariffed inventory left to pull forward, the big moves were largely over and margins were holding steady. 

It’s hard to call balls and strikes in the trade war this early in the game.

Depending on how tariffed inventory is accounted for, many retailers won’t really feel the effects until well into 2020. But so far Williams-Sonoma has demonstrated its ability to take big, yet calculated swings quickly, and react to tariffs in real-time with concrete actions.

The Trump administration is unpredictable (to put it mildly) and the companies that have demonstrated agility and readiness to change sourcing, re-engineer their production processes or cut back on unnecessary overhead — all while preserving the top-line and keeping inventory levels in check — are few and far between. Williams-Sonoma is one such company, which is why Supply Chain Dive recognizes its resilience plan this year.