Dive Brief:
- Home Depot has mitigated half of its potential tariff cost with a data-driven approach that analyzes tariff impact at the SKU-level, executives said on the company's third-quarter earnings call Tuesday.
- Tariff concerns contributed to the retailer's decision to lower sales guidance in Q2 and again in Q3. In August, Home Depot put the cost of list one through four tariffs at $2 billion for the year — with list one through three at a duty rate of 25% and list four at 10%. A JP Morgan research note from May put Home Depot's total sourcing exposure to China at 16% — 11% on list three.
- "We know down to the SKU level the point of origin, the classification of the tariff, the potential impact. And from there we start working with our supplier partners to mitigate that tariff impact," said Executive Vice President of Merchandising Ted Decker.
Dive Insight:
Decker said Home Depot's tariff mitigation work is a data-driven effort integrating the company's merchants, finance and data analytics teams which lead to a strategy based on the actual and not theoretical impact of tariffs.
In August, Decker said the company had fully analyzed the effect of tariffs on Home Depot's balance sheet, but the SKU-by-SKU analysis was a new detail of the mitigation efforts offered Tuesday.
It's a level of focus that Decker said is shared by their vendors overseas. "Home Depot and our supplier partners are laser-focused on maintaining unit growth in this business," he said.
The mitigation efforts Decker listed were more or less those mentioned in every tariff conversation: changing country of origin, or changing the way the product is manufactured or finished to change the tariff classification.
Half the tariff cost is handled, but price increases on some items have been necessary, said Decker. Home Depot has been working for several quarters to understand the "elasticity" in each category, meaning how much extra cost an item can incur without losing too much margin. Price increases, though will not materially contribute to sales figures in the future.
While the specter of list four tariffs has, in part, driven an increase in private inventories across categories, Home Depot said inventory was up 5% in Q3, not related to tariffs, but to enable faster resets.
The home improvement category is highly competitive, with promotions somewhat central to that competition, meaning raising prices is a risky prospect. When it comes to tariffs though, the playing field is fairly level at least between the top two players.
JP Morgan estimates that Home Depot and Lowe's have equal exposure to China when it comes to sourcing and though Lowe's did not discuss mitigation tactics on its Wednesday earnings call, the company reported tariffs cost it 40 basis points of gross margin.
