HD Supply Holdings, Inc. (NASDAQ:HDS) Q2 2019 Earnings Conference Call Transcript
Sep 10, 2019 • 08:00 am ET
Thank you. [Operator Instructions] Our first question comes from Nigel Coe with Wolfe Research. Your line is now open.
Thanks. Good morning. Thanks for the question. First of all, can you maybe just touch on the comment you made about tariffs pressuring gross margins, fully understand that dynamic. But maybe talk about the negative impacts in terms of operational offsets and also any resourcing that you're doing? And then maybe just touch on how your exposure, the 12% of FM sales that is come in from China, any resourcing activity that you're undertaking?
Yeah. So, Nigel, obviously, the tariff environment has been very volatile and we laid out the current expectations for that tariff environment, which, of course, is subject to change. We will always attempt to offset any cost increase, tariff or otherwise, as our first course of action and that starts with good negotiations as part of our overall merchandising process. The US dollar has continued to strengthen against the local Chinese currency. So we certainly look to take advantage of that. We also look to take advantage of the overall competitiveness of the Chinese factories, which, because of the tariffs, are becoming less competitive to the rest of the world. We're also seeing and we were seeing this even before the tariff dispute began, a migration away from China into other low-cost source countries in Asia and Mexico. We expect that to continue and if the tariff environment continues, we actually expect that to accelerate and I think you're already beginning to see that.
Certainly, we'll look to improve our own productivity through our supply chain and our transportation network and our distribution centers. And then the unavoidable cost increase after we've mitigated as much as we can, we do expect to pass on through price. Now, we pass on cost increase through price very surgically on a SKU-by-SKU basis, and that doesn't mean that every dollar of tariff on a given SKU results in a $1 increase in that particular SKU. We use our pricing analytic tools to understand the price elasticity of the various SKUs and the market dynamics of the pricing of the various SKUs to very surgically adjust pricing SKU-by-SKU, not category-by-category, but SKU-by-SKU, and that's been successful for us so far. We've been pleased with our margin performance so far, but as you know, the tariff environment is getting more and more difficult. But we'll continue to navigate that. We think we can do it better than most.
As far as our exposure, 18% of our Facilities Maintenance sales are from our proprietary brands. Two-thirds of which are sourced in China. So that's about that 12% that you are referring to, and that's what we're managing. To-date, it's been about a 1% increase in overall Facilities Maintenance sales to pass-through the unavoidable cost increase, and we'll continue to monitor that and work hard to take cost out to avoid having to raise prices.
Thanks, Evan. And then a quick one on the Atlanta