Coffee costs in Q1 were higher than anticipated, with additional costs expected in Q2 due to hedging and green coffee receipt timing.
Coffee segment pricing benefit updated to mid-20% for fiscal 2026, up from prior 20% estimate.
Coffee volume expected to decline low to mid-teens percentage due to tariff impacts and price elasticity.
First quarter EPS was the softest quarter; second quarter decline now expected greater than first quarter, with a more muted third quarter.
Free cash flow outlook increased from $875 million to $975 million, driven by benefits from the Inflation Reduction Act.
Hostess SKU rationalization did not impact first quarter volume but expected to improve profitability over time.
Overall profit outlook remains intact despite tariff headwinds, with coffee segment profit expected to align with original guidance after absorbing tariffs.
SKU rationalization in Sweet Baked Snacks expected to yield $30 million savings, with $10 million in Q4 and $20 million in fiscal 2027.
Impact of Tariffs on G-III's Inventory and Margins
Management highlighted that higher-than-expected tariff costs, primarily from increased shipments from Vietnam, India, and Indonesia, impacted gross margins in Q2 2026.
The company is actively mitigating tariff pressures through vendor participation, sourcing shifts, and targeted price increases, but is currently absorbing some costs to stay competitive.
Tariff impact was estimated at approximately $75 million unmitigated, with a total incremental tariff cost of about $155 million for fiscal 2026.
The company’s strategic decision to hold and reroute product from India, where tariffs reached 50%, was aimed at protecting margins despite affecting the year-end topline.
Management expects gross margins to normalize and expand as they exit lower-margin licenses and increase penetration of owned brands.
Tariffs have influenced inventory decisions, leading to a 5% increase in inventory levels and a cautious approach to inventory buybacks.
The impact of tariffs on margins is expected to be most pronounced in the fourth quarter, with some relief anticipated in the second half of next year.
Impact of Tariffs and Mitigation Strategies on Margins
Management highlighted ongoing tariff impacts, estimating a 250 basis point gross margin pressure due to tariffs in the Brand Portfolio segment.
Mitigation efforts include sourcing country mix adjustments, factory concessions, and selective price increases, but lag effects mean pressure persists into the second half of 2025.
The company expects gross margin pressure from tariffs to continue into the third quarter, with some normalization anticipated in the fourth quarter as mitigation strategies take effect.
Approximately $10 million of sales in Q2 were negatively impacted by tariffs, split evenly between cancellations and delayed receipts, with recovery expected in Q3.
Management emphasized the lag between tariff enactment and mitigation effectiveness, which complicates short-term margin recovery efforts.
The company is actively exploring additional cost savings and efficiency measures to offset tariff-related margin pressures.
Dafinchi
