Companies and investors race to mitigate Trump tariff risk. How one iconic firm is adjusting
When Donald Trump clinched a decisive victory in the 2024 presidential election last month, Stanley Black & Decker executives knew they had a problem on their hands. In fact, as soon as the results were known, the tool company began having conversations with key channel partners on what to do next, CFO Patrick Hallinan said at an industry conference last week. Wall Street was also alarmed. The day after the Nov. 5 election, Club stock Stanley Black & Decker declined nearly 2%. Trump was declared the winner in the early morning hours of Nov. 6. Since then, shares have dropped more than 11% versus the S & P 500’s more than 6% gain. The market reaction, however, has little to do with something of Stanley Black & Decker’s own doing — but rather, the incoming administration’s proposed tariffs. Trump has threatened to increase levies on Chinese imports to 60% and on Mexican and Canadian-made goods to 25%. Stanley Black & Decker, founded in 1843 as Stanley Works, is one of thousands of companies mulling over strategies to offset the kind of pressure that rising tariffs would present. Some management teams have been looking to move production to other countries. Others are cutting costs to offset any potential hits to sales and profits. Constellation Brands CFO Garth Hankinson said his team has been adjusting its inventory in anticipation of potential increases in Mexican import tariffs. Constellation, the Mexican brewer of Corona, Modelo, and Pacifico, is also a holding in Jim Cramer’s Charitable Trust, the portfolio used by the CNBC Investing Club. Goldman Sachs lead industrials analyst Joe Ritchie described Stanley Black & Decker as “the poster child” for companies he covers that stand to be most impacted by the tariffs should they become policy. That’s because about 25% of Stanley’s tools and outdoor segment’s U.S. cost of goods sold are sourced from China. Since labor and property are less expensive in the world’s second-largest economy, big companies like Stanley Black & Decker have historically moved production there to save money. But the tides have been turning — first, during Covid when supply chains out of China were disrupted; and now, in preparation for the expected tariff increases. Stanley Black & Decker said the magnitude of the levies proposed by Trump could squeeze company profits, resulting in an annual $200 million pretax hit to operating income. That forecast, however, does not factor in any actions that the company can take to lessen the impact. “They had to come out with a number to just give the market a sense of what it could be or else the market was going to guess on their own, and that’s never a good thing,” Ritchie told CNBC in an interview last week in New York City at the annual Goldman Sachs Industrials and Materials Conference. SWK YTD mountain Stanley Black & Decker (SWK) year-to-date performance At the conference, Hallinan reiterated the company forecast and outlined its strategy to navigate potential headwinds during another four years of Trump as president. The plan is three-fold: Reposition supply chains, move production away from China, and raise prices for products to offset any additional costs for the company. “We’re going to have to continue reducing our U.S. market exposure to the China market,” the CFO told attendees. “Irrespective of what administration came in, we were going to be on this journey.” He added that the proposed tariffs, however, might just “accelerate this pace.” That’s not going to be a quick journey. It could take 12 to 24 months to see material impact from supply chain changes, Stanley Black & Decker said in a securities filing earlier last month. Nevertheless, management continues to reiterate its view that adjusted gross margins can meet or surpass 35% in the long term. As for looming price hikes, Hallinan said the DeWalt and Craftsman owner has been in talks with these supply chain partners about potential outcomes. Although not mentioned by Hallinan last week, supply chain partners for Stanley Black & Decker include big box retailers like Lowe’s and Club holding Home Depot that sell the company’s products. The CFO added that Stanley’s priority is to work in a “proactive, transparent, and forthright manner with [them.]” Increasing prices with these channel partners, Ritchie said, is no easy task. “It’s really, really difficult to negotiate pricing with [companies like] Home Depot and Lowe’s, especially given that there’s been the hangover effect from the pandemic,” said Ritchie, managing director of Goldman’s U.S. Industrials & Materials business unit. “During the pandemic, a lot of folks did home improvement projects … that pulled forward a lot of demand for their products. And, because of that, the outlook of their business has been very muted post-pandemic.” But this isn’t Stanley Black & Decker’s first rodeo with higher levies on imports. After China tariffs were first implemented under Trump in 2017 and 2018, management said its original unmitigated exposure was more than $300 million. As a result, the company began shifting its supply chain and increasing prices, which both helped reduce the gross impact to below $100 million annually and offset the rest to fully neutralize the annualized impact. “The reality is that they now have a playbook for tariffs that they didn’t have the first time these were put in place,” Ritchie said. With all of that in mind, here’s where we stand on the stock moving forward. Last week, the Club made the tough decision to downgrade our Stanley Black & Decker rating to a 3, meaning we plan to sell into any strength. From a portfolio management point of view, it’s wise to reduce our tariff risk before Inauguration Day in January. At the same time, however, we don’t want to lose exposure to the home improvement theme because housing turnover is at a 30-year low, and the pent-up demand will be unleashed when mortgage rates fall. That’s why the Club plans to lighten up on Stanley Black & Decker and use those future sale proceeds to get bigger in names like Home Depot. (Jim Cramer’s Charitable Trust is long SWK, STZ, HD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Stanley Black & Decker power drills are displayed for sale at a Home Depot store in Colma, California.
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