Dive Brief:

• Williams-Sonoma will halve the amount of goods it sources from China today by 2020 — in addition to the mitigation work the retailer has been engaged in since last year, CFO Julie Whalen said on a recent earnings call.
• Efforts to mitigate the proposed list four tariffs are underway as well, including pulling shipments forward to beat the tariffs, which could take effect this summer.
• Roughly 15% of the retailer's products are affected by the tranche three tariffs recently increased from 10% to 25%, according to J.P. Morgan analysts. The analysts put the retailer's total exposure to China at 20% of direct and indirect sourcing.

Dive Insight:

Williams-Sonoma made 2019 forecasts anticipating a jump from 10% to 25% on list three tariffs, and "unfortunately, our pessimism turned out to be true," said Whalen on the call.

Research by J.P. Morgan analysts suggests without mitigation (such as vendor negotiations), Williams-Sonoma would need to raise prices by 11% to dull the impact of tranche four tariffs. Without any mitigation work, including price hikes, the analysts predict the retailer would see a 7% dip in operating margin from tranche four alone.

The tranche three and four tariff lists combined could tank margins by 19% without mitigation. But Williams-Sonoma has been mitigating the tariffs from multiple directions, including moving some production out of China and rationalizing its suppliers, which has largely comforted analysts.

In addition to the usually more granular work of engineering products and processes to avoid tariffs, Williams-Sonoma is also expanding its U.S. manufacturing operation by hiring 500 additional workers for its Tupelo, Miss., factories. Outside of the U.S., the retailer has shifted production from China to Vietnam, Indonesia, Thailand and Cambodia, according to Whalen.

The executives did not say whether Williams-Sonoma will have to raise prices, as some lower-margin retailers have stated, but they did say the retailer has introduced products with a lower price point to offset any necessary price increases.

"At the same time that there is pressure ... we’ve made a big effort to bring in a lower-priced product at the same time. So we don’t believe our value equation will be hurt by selective price increases," said Whalen.

For Williams-Sonoma, like many retailers in the first quarter, strong sales cushioned some of the blow from President Trump's May trade war escalation. Revenue for the company was up 3% year-over-year in the first quarter.