Acuity Brands Plans Oct. 15, Jan. 1 Price Hikes to Offset Costs of Chinese Tariffs
LED lighting and home-control supplier Acuity Brands estimates the first two rounds of Trade Act Section 301 tariffs on Chinese imports enacted through Aug. 23 helped reduce the company’s adjusted gross profit by more than $20 million in Q4 ended Aug. 31, said CEO Vern Nagel on a Wednesday earnings call. Though Nagel said “wage inflation” and higher freight costs also contributed to the profit decline, Acuity's plight was among the first documented examples of a company taking an actual big financial hit from the 25 percent tariffs that took effect over the summer.
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Tariffs “could have a dampening effect on overall demand due to higher component costs and finished good prices,” especially after Jan. 1 when the duty rate on the third tranche of tariffs that took effect Sept. 24 increases to 25 percent from 10 percent, said Nagel. “It is not possible for us to precisely determine what the potential impact tariffs will have on demand as it is a very complex situation impacted by numerous factors including currency fluctuations and political outcomes.”
Acuity “primarily” manufactures its products in North America, but sources “certain components” and about 15 percent of its finished goods from China, and all those are exposed to the recently enacted third tranche of tariffs, said Chief Financial Officer Ricky Reece. “We are aggressively seeking to mitigate the impact on our profitability of these added costs," including finding alternative supply sources outside China and “in-sourcing” the production of certain products, he said.
Raising prices will be the company’s first near-term strategy, said Reece. Effective Oct. 15, Acuity will hike prices 6 percent on the “majority” of its products and 10 percent on its “China-sourced finished goods,” he said. The price hikes “are directly related to the increased tariffs,” he said.
Acuity has announced it plans to raise prices again, effective Jan. 1, when the tariffs increase to 25 percent, said Nagel, without saying by how much. “Few would have the ability to absorb that” 25 percent increase, he said. “The question for us is how much does that influence demand?” Acuity “didn't announce what that price increase would be, but we said it would be effective that date, so we gave our many, many channels way advance warning on this,” said Nagel.
Though Nagel expects “some gamesmanship” to play out as competitors try to use stockpiles of lower-priced inventory to ride out price hikes for as long as they can, the 25 percent increase will be “too much for someone to absorb for too long." It’s inevitable the industry will “put through” price increases that “go all the way to the end consumer, so do I use that as an opportunity to optimize my margin?” he asked. Industry talk of such scenarios typifies “all the noise out there,” he said. “Our view is that the industry follows through on these price increases.”