New tariffs on Chinese imports scheduled to hit in September and December will squeeze Kohl's Corp.'s gross margin in the second half of 2019, the retailer's CFO Bruce Besanko told analysts on Aug. 20.
"We saw the effects in both Q1 and Q2. We'll see these impacts in Q3 and Q4, but we do have it embedded in our guidance right now," Besanko said during an Aug. 20 call discussing Kohl's second-quarter results with analysts.
Kohl's beat earnings expectations for its fiscal second quarter, though executives revised the company's fiscal 2019 gross margin guidance to include a drop of 35 to 45 basis points from 36.4% of total revenue in the prior year, compared to previous estimates of 20 to 30 basis point drop. The revision reflects the company's performance during the first half of the year and the new tariffs on imports from China, executives said.
U.S. officials earlier in August announced plans to impose the new 10% tariffs on some Chinese imports starting Sept. 1, while tariffs on other products will take effect on Dec. 15. The latest tariff package includes consumer products such as clothing, footwear, electronics, and toys. It follows the three separate rounds of U.S. tariffs on $250 billion in total goods from China.
Despite the expected impact from the tariffs, Kohl's executives suggested that the retailer has no immediate plans to boost prices.
"We know that our customers are driven by our value proposition, so we will ensure that our customers continue to receive the value they expect from Kohl's," CEO Michelle Gass said. "We have lots of tools in place to monitor [price] elasticity and what the competitive environment is. So we'll make very sound and surgical decisions as these issues come forward."
Other retailers including Macy's Inc. and Walmart Inc. have also recently expressed hesitation over raising prices due to the latest tariffs. Macy's CEO and Chairman Jeffrey Gennette said during an Aug. 14 investor call that the retailer does not plan to increase prices on products subject to the latest tariffs.
Kohl's has reduced its dependence on China over the last few years and will continue to work with its vendor partners remaining in China, Gass said.
Previous rounds of tariffs also squeezed Kohl's second quarter margin, contributing to a 72 basis point drop to 38.8% of total revenue from 39.5% in the year-earlier quarter. Promotional sales also added to the drop, executives said.
The retailer also reported greater impacts to margins from increased shipping costs related to a growing digital business. Digital sales in the second quarter grew in the mid-teens compared to the single-digit growth reported in the first quarter.
Kohl's executives, though, are "highly encouraged" by the performance of its return program with Amazon.com Inc. The partnership, which allows customers to return select products bought on Amazon.com to Kohl's stores nationwide, is expected to contribute to fiscal 2019's operating income, Gass said without detailing the expected addition.
"Traffic coming into our stores is meeting our expectations and skewing towards off-peak times. We are seeing a mixture of existing customers and new younger customers using the service," Gass said.
Kohl's is also planning to test a new website in the fall that includes improved navigation, filtering, and images, with the goal of "improving the overall customer experience and driving even better conversion," Gass said.
