Tariffs threaten The Container Store's turnaround
Analysts with S&P Global on Thursday flagged disappointing second quarter results from The Container Store as the home organization retailer faces "heightened tariff pressure" after the Trump Administration this year levied new tariffs on Chinese imports, according to an S&P release emailed to Retail Dive.
In a Tuesday call with analysts, Container Store CEO Melissa Reiff laid out the scope of the issue, saying 37% of the retailer's products last year came from China, according to a Seeking Alpha transcript. Current tariffs would have hit 12% of the company's total 2017 purchases from vendors, she added.
On Tuesday, the retailer reported second-quarter net sales rose 2.8% year over year to $224.5 million, as store comps rose 1.3%, and net income reached $3.2 million, up from a net loss of $0.9 million in the year-ago period. The results fell short of analyst estimates, and S&P noted that jittery investors sent the company's stock price down 45% after the earnings release.
The Container Store shares were hit hard this week amid signs that the retailer may need more time to achieve a turnaround, and new tariffs are hardly going to help it speed things up.
The retailer continued its momentum in custom closet sales, but some of its new merchandise fell flat, which hurt store comps and profits, Reiff said in a statement. However, she reiterated the company's 2018 performance guidance and added that once the retailer "cycled the merchandise campaign changes," other category comps turned positive.
But tariffs could box the retailer in further next year, and S&P analysts said they would be keeping an eye on how well the company manages to blunt their impact. "While our ratings on the company remain unchanged, we will continue to closely monitor its latest pricing and marketing initiatives, the flexibility of its supply chain as it attempts to mitigate its exposure to potential tariffs on goods sourced from China, and its ability to meet its full-year profit guidance," they said in comments emailed to Retail Dive.
Reiff said Tuesday that The Container Store is taking a three-pronged approach to mitigating the effects of new tariffs on Chinese goods: working more directly with factories instead of third-party wholesalers, sometimes outside China; negotiating with vendors to share the impact; and shifting some of the burden to customers through higher prices.
The Container Store is hardly alone. The risk to retailers from tariffs, added to already rising labor and freight costs, is threatening their bottom line for the end of the year and into 2019, according to a note from Morgan Stanley analysts led by Kimberly C. Greenberger. "[C]ost pressures persist (promotions, transportation, and labor) and could result in lackluster and uninspiring incremental margins," she wrote in comments emailed to Retail Dive. "We think it is important to consider 2019 when tax reform benefits and easier top-line comparisons are lapped. Existing headwinds to costs could continue while relatively new ones such as tariffs will take hold."
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