Hasbro Inc. will raise prices if additional tariffs on Chinese imports are enacted, the toymaker's CEO Brian Goldner said on Oct. 22. The toymaker's top executive is also anticipating disruptions in retailers' sourcing strategies as they attempt to mitigate the impact of tariffs caused by the ongoing trade war between the U.S. and China.
"We are actively communicating that if the Dec. 15 tariffs were to go into effect, we would take pricing to again protect our gross margin, and those price increases would be passed along to consumers," Goldner said on a call discussing Hasbro's third-quarter earnings results which were dampened by costs associated with tariffs. Hasbro's shares plunged 15% to $101.84 in early afternoon trading following news of the company's weaker-than-expected earnings.
The implementation of existing tariffs and the threat of new duties resulted in higher shipping and warehousing costs for the toymaker during the third quarter as retailers adjusted their buying strategies to limit exposure to the tariffs. Retailers are shifting from placing direct import orders, which allows them to take ownership of the products in China, to domestic orders where they take ownership in the U.S. The buying changes were made over a short period of time, giving Hasbro a small window to meet demand, according to Goldner.
During the third quarter, domestic shipments increased to 59% from 51% of orders from the year-earlier quarter, leaving the toymaker unable to fulfill all of its orders.
"We did incur some incremental shipping and warehousing expense, including some airfreight, which also impacted our margin. We've been catching up in the fourth quarter, but we also are still looking at a potential Dec. 15 date for the enactment of tariffs," Goldner said.
Although the U.S. and China on Oct. 11 reached a partial deal that included the delay of a tariff hike on Chinese imports previously scheduled for Oct. 15, the tariffs slated for Dec. 15 are still expected to be enacted.
If implemented, the Dec. 15 tariffs on consumer goods including toys could further push retailers to cancel direct import orders from China and opt for domestic shipments leaving the responsibility of importation and fulfillment to Hasbro.
"The team is working on programs to help mitigate this impact as well as the impact on our customers this holiday season, but we anticipate continued potential disruption in the fourth quarter," Goldner cautioned.
Hasbro currently sources 20% of its merchandise sold in the U.S. from domestic sources and is on track to source 50% of its products from China by the end of 2020, according to Goldner. Like other companies facing the challenge of tariffs, the toymaker is continuing to source from other countries including Vietnam and India.
The company's executives also updated analysts on the progress of its acquisition of media company Entertainment One Ltd. The company has obtained regulatory approvals from the United States and Germany and is waiting on approvals from Canada and the U.K. Hasbro expects to close the deal during the fourth quarter.
Hasbro also expects to suspend its share repurchase program in order to use its cash flows on reducing leverage arising from the transaction. The toymaker repurchased $1.5 million worth of common stock during the third quarter.