American Eagle Outfitters is aiming to reduce China to around 20% of its production in the next 12 to 18 months

American Eagle Outfitters is aiming to reduce China to around 20% of its production in the next 12 to 18 months

Retailer American Eagle Outfitters says it is continuing to pull production out of China in the wake of new tariffs introduced on imports into the US – and warns if they increase from 15% to 25% it may be forced to pass the cost on to consumers.

The comments came in a post-earnings call with analysts yesterday (4 September) after the company reported an 8% rise in second-quarter net revenue to a record $1.04bn, compared with $965m the year before. Net income, meanwhile, climbed to $65m, up from $60.3m last time. 

Commenting specifically on the business impact of the ongoing trade spat between the US and China, chief financial officer Bob Madore explained the company has taken several steps and has been actively collaborating with its sourcing partners to mitigate the potential impact.

"We continue to make progress in further reducing our exposure to China tariffs through a combination of partnering with vendors and diversifying our geographic production capabilities. Based on recently enforced tariffs List 4, we do not expect a material impact this year. At present, we expect the impact to be manageable in 2020."

The rapidly-changing tariff situation saw the US impose new levies on another tranche of imports from China on 1 September, meaning around US$31bn in textile, apparel and home textile products from the country are now subject to an additional tariff of 15%. The new tariffs will hit 92% of all apparel products and 53% of all footwear items imported into the US from China.

The remaining US$160bn in US imports from China – including US$4.7bn in textile, apparel and home textile products – are set to be hit by an extra 15% tariff from 15 December.

Madore said AEO's production sourcing team has been able to mitigate over two-thirds of the tariff exposure by negotiating with manufacturing partners in China and migrating some production to other geographies. 

"Today, China represents about 30% of our production. We believe in the next 12 months to 18 months, we'll be able to drive that down to 20% or below 20%, slightly below 20%."

Should the tariffs increase to 25%, however, as they have already done in earlier punitive tariff rounds, the company said it may have to look at raising ticket prices.

"I think we just have to be very careful; we've always been a brand that represents value. I think if tariffs do go to 25% and we're still making a percentage of our goods in China, we need to look at some of those styles where maybe there's an opportunity for a few dollars here or there," added global brand president Chad Kessler.

"But I think the environment will continue to be competitive and we will continue to be a leader representing value in the space. So I don't think we can look at any sort of across-the-board increases in ticket. But then again, we have to look at it as the news breaks and as things come across, and use our best judgment at that time."

Several major US brands have taken steps in recent weeks to mitigate the impact of tariffs. Check out just-style's coverage here