Levi Strauss & Co. geared up to combat the imposed tariffs on imports from Mexico and increased tariffs on Chinese imports
The success of Levi Strauss & Co. and other U.S. companies has been fueled in part by free trade policies that ensure U.S. consumer access to high-quality products at reasonable prices. The tariffs broadly hurt all U.S. consumers, workers, businesses and the overall U.S. economy.
President Trump announced that, starting from June 10, the United States may impose a 5 percent tariff on all goods imported from Mexico and increase that tariff by 5 percent each month until it reaches 25 percent. Additionally, the U.S. government continues to increase tariffs on goods imported from China, expanding the tariffs to include apparel imports, as the U.S. and Chinese governments negotiate on trade and investment issues.
While Levi Strauss opposes tariffs as it will have direct impact on the consumers, the company has taken steps to help insulate its business from the negative impacts of these kinds of policies in light of the recent global policy environment; and it says it does not anticipate this new proposed tariff will have a material impact on its business.
The company’s sourcing from Mexico and China combined comprises 15-20 percent of LS&Co.’s U.S. import. Given the ongoing threat of tariffs and trade disputes, the company has been proactively managing down sourcing from each of these countries over the past two years.
Currently, total annual China imports represent less than 8 percent of U.S. imports, and it is in the process of actively managing this down to very low-single-digits by Fiscal year 2020. “We expect that the economic impact of the tariff on China imports to the U.S. will be negligible in Fiscal years 2019 and 2020,” says the company.
Currently, total annual Mexico imports represent approximately 8 percent of U.S. imports. If enacted, the company anticipates the proposed Mexico tariffs would have a negligible impact in Fiscal 2019; and it will be able to substantially mitigate any impact in Fiscal 2020 and beyond.
If left unmitigated, LS&Co. would anticipate the worst-case scenario to cause a 10 bps gross margin impact in Fiscal 2019 and a 50 bps gross margin impact in Fiscal 2020. The marginal impact on Fiscal 2019 is due, in part, to the fact that the company is already more than halfway through the current fiscal year. LS&Co. has a successful track record of reducing the impact of these types of disruptions, including its previous handling of the cotton crisis of several years ago and, more recently, the currency crisis.
Regarding the potential for tariffs targeting Mexico, LS&Co. has several possible levers available to mitigate the impact, including: Cost sharing with its suppliers in Mexico; Moving sourcing to other markets in its supply chain; Raising prices to reflect the impact of the tariff; and/or Offsetting these increased costs with other cost-saving initiatives.
These types of strategies have served the company successfully during past disruptions and did not create material negative impact from consumers or to the long-term financial health or performance of its business. “Given that we have a number of options to employ if it becomes necessary, and in consideration of the six-month lead time we have to finalize our approach to Fiscal 2020, we are confident that we will be able to substantially mitigate the impact of these potential tariffs to Fiscal 2020 and beyond, were they to be enacted. While we are confident in our ability to mitigate this specific disruption – if it happens – we still believe wholeheartedly that businesses, workers, and consumers always benefit more from an open global economy and are hurt by policies such as this proposed new tariff. Tariffs are taxes paid by U.S. businesses, and consumers ultimately pay the price in the form of higher prices on consumer goods.”- , LS&Co.Highlights News Retail US