Williams-Sonoma pulling forward 'as much inventory as possible' ahead of list 4 tariffs

Dive Brief:

Williams-Sonoma raised its full-year net revenue forecast for 2019 for the second time this year Wednesday even after factoring in the tariff increases the Trump administration announced last week on existing tariffs and the list four tariffs taking effect Sunday and Dec. 15.
"We are continuing to pull forward as much inventory as possible this quarter, which appears to be a good idea in light of the most recent tariff announcement," CFO Julie Whalen said on the company's second-quarter earnings call. Whalen emphasized the uptick in inventory is not entirely due to tariffs, and somewhat a response to growing demand within some of the company's brands such as West Elm and Pottery Barn. Backorders are down 20% from last year as a result.
Whalen said the company continues to execute on its "aggressive plan" to mitigate tariffs, which includes cost reductions from vendors, moving production out of China, cutting costs in other areas of the business, along with some price increases — all orchestrated by a dedicated team. In June, the company announced it would halve sourcing from China by 2020.

Dive Insight:

Though executives were confident in their ability to grow top-line business despite the tariff environment, the company's guidance boost would have been higher had President Trump not raised all tariff rates, existing and forthcoming, by 5 percentage points, Whalen said.

Whalen wouldn't share how much of Williams-Sonoma's balance sheet is affected by tariffs at this point — after all, with the new lists and the company's sourcing shifts, that figure is a "moving target," she said. In June, J.P. Morgan analysts put Williams-Sonoma's total exposure to list three tariffs at 15%.

The company doesn't forecast ahead gross margin, but CEO Laura Alber told analysts to expect pressure through the end of the year. Gross margin was down for the quarter, driven by the shipping costs associated with a higher mix of furniture sales, Whalen said. But operating margin grew by 10 basis points in the second quarter compared to the same period last year. Alber said the company plans to reduce promotions and rationalize SKUs in the coming quarters to bolster margins.

Williams-Sonoma brought in "as much inventory as possible" ahead of the list four tariffs, and Alber said that practice will not affect margins nor necessitate markdowns down the line.