Impact of Tariffs on Business Operations and Pricing Strategy
The company has implemented a multifaceted approach to managing tariffs, including diversifying suppliers, accelerating tariff cost reductions, leveraging scale for savings, driving internal cost efficiencies through automation, and implementing targeted price increases in Q3.
Tariff costs are currently impacting inventory costs immediately, but the effect on cost of goods sold (COGS) will be seen starting in Q4 due to inventory accounting methods.
Price increases to offset tariff costs are scheduled for Q3, with positive effects on net sales beginning then, but gross margins expected to decline in Q4 as tariff costs are recognized in COGS.
The company has a strong liquidity position ($656 million in total liquidity) and is managing debt levels to navigate tariff-related uncertainties.
The complete greenfield implementation of a new ERP system in the U.S. began in July 2024, replacing a 25-year-old system.
The transition caused a temporary blackout period, leading to a 2-week inventory build by retailers, which impacted sales by approximately 3.5-4% in FY '25 and will cause a similar dip in FY '26.
Higher-than-expected shipments in Q4 due to retailers ordering more than their commitments, resulting in a gross margin impact of about 150 basis points for the quarter.
The ERP transition is a complex, once-in-a-generation project expected to be fully stabilized by FY '27, with ongoing benefits in data visibility and cost management.
Dafinchi