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Why At Home Group Inc Stock Plunged on Wednesday

Jordan Wathen, The Motley Fool

What happened

Shares of At Home Group Inc (NYSE: HOME) are plunging, down by nearly 12% as of 3:20 p.m. EDT Wednesday as investors try to handicap the winners and losers in a developing U.S.-China trade war.

President Donald Trump is reportedly preparing to institute a 10% tariff on more than $200 billion of Chinese-made goods, which could lead to rising inventory costs for home goods retailers that source more of their merchandise from China, At Home Group included.

So what

The Plano, Texas-based retail store chain sells home goods and furnishings, of which a majority are purchased from overseas sources, including China. 

In the company's most recent 10-K filing, At Home Group said that "approximately 60% of our merchandise was purchased from vendors in foreign countries such as China, Hong Kong, Belgium, Taiwan, India and Vietnam during fiscal year 2018." 

Woman shopping for a mattress.

Image source: Getty Images.

As for the 40% of merchandise purchased domestically, much of it can be traced back to international suppliers, too. To illustrate the point, it specifically identified China as a primary source for many of its goods.

"For example, we purchase merchandise from domestic vendors that is imported from China or that is manufactured in China and assembled in the United States," it wrote in a regulatory filing.

Now what

The proposed tariffs wouldn't go into effect immediately, as they are subject to a two-month review process, but Wall Street seems eager to sell now and ask questions later.

Retail is a brutally competitive industry where even the best operators survive on precariously thin margins. In its 2018 fiscal year, which ended in January, At Home Group generated gross and pre-tax margins of 32.3% and 6.9%, respectively.

If its inventory costs were to increase by 10% (reflecting a 10% tariff on all merchandise), its pre-tax profit would all but disappear. 

Of course, not all of At Home Group's merchandise would be subject to a tariff, and there's reason to believe it can pass on some of the higher costs to consumers in the form of higher prices.

But retailers must carefully balance the desire to maintain their margins without driving away price-sensitive customers. Tariffs make that balancing act that much more difficult.

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Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.