What Tariffs Actually Change for An Investment
American Outdoor Brands reported a 25.4% increase in quarterly sales in September, but much of that growth reflected an unusually weak comparison with the previous year. After adjusting for orders retailers had brought forward ahead of expected tariffs, sales rose by just 4.3%. Gross margin, meanwhile, reached 53.0%, helped by higher prices, a more profitable product mix and the timing of tariff costs passing through inventory.
Retailers had placed orders early to avoid import duties, leaving fewer orders for subsequent quarters. The manufacturer then raised prices to recover its costs, while goods carrying the higher tariffs remained in stock. Customs had already collected the money, but the full expense had not yet reached reported profits.
Investors following tariffs face two questions: how much of the additional cost a company will ultimately bear, and when that cost will appear in its financial results. The answers depend on supplier contracts, selling prices, customer demand, exchange rates and how long goods remain in inventory.
The Tariff Hits The Importer First
An imported component with a customs value of $100 attracts another $20 in duty if the applicable tariff is 20%. The importer pays the customs authority when the goods enter the country, but may recover some of that money by negotiating a lower price with its supplier or charging customers more.
The cost can also pass further along the supply chain. A manufacturer may raise the price of its finished product, a retailer may accept a smaller profit margin, or customers may buy fewer units when prices increase. Existing contracts determine how much freedom each company has to pass on the charge.
Tredegar, which produces aluminium extrusions and polyethylene films, passes tariffs and duties through to customers under its metal-cost adjustment mechanism. The company also introduced price increases to cover tariff costs outside that arrangement. In the first quarter of 2026, pricing contributed $4.6 million to the year-on-year change in contribution margin, although lower volumes and higher labour, freight and other costs offset some of the benefit.
Lift-truck manufacturer Hyster-Yale had less room to recover its costs. In August, management warned that tariffs on steel, Chinese components and other imports would remain a substantial expense throughout 2026. Higher prices, changes to suppliers and lower production costs were expected to recover only part of the increase.
Tredegar could pass more of the expense to customers through contractual pricing, while Hyster-Yale expected to absorb a larger share. Both faced tariffs, but their contracts and markets produced different financial outcomes.
The amount collected at the border can also change when governments amend duties or courts overturn them. Following the US Supreme Court’s February 2026 ruling against tariffs imposed under the International Emergency Economic Powers Act, or IEEPA, the administration introduced other trade measures. American Outdoor Brands reported new Section 301 tariffs of 10% or 12.5% in July, depending on origin, alongside duties already applying to certain products.
Companies importing from several countries must therefore calculate the duties on each product and account for exemptions, overlapping measures and possible refunds. They must then decide whether customers will accept the prices needed to recover those costs.
Higher Prices Do Not Guarantee Higher Profits
American Outdoor Brands raised prices during fiscal 2026 to offset tariff costs. Its gross margin edged up 10 basis points to 44.7%, supported by the timing of those increases and a larger share of higher-margin new products. Tariffs, inbound freight and slower-moving inventory worked against those gains.
Sales had already been affected by customers changing when they placed orders. Retailers accelerated approximately $10 million of purchases into the end of fiscal 2025, allowing them to secure products before expected tariffs took effect. Those orders then disappeared from the following year’s sales comparisons.
The effect became clearer when American Outdoor Brands reported its first quarter of fiscal 2027 in September. Net sales rose 25.4% to $37.3 million, but growth was only 4.3% after adjusting for approximately $6 million of orders brought forward from the comparable period a year earlier.
Gross margin improved to 53.0%, compared with 46.7% a year earlier, as new products, sales-channel mix and earlier price increases supported profitability. The timing of tariff costs passing through inventory also influenced the result. Meanwhile, the company’s quarterly net loss narrowed from $6.8 million to $1.5 million.
An investor looking only at the 25.4% sales increase would have missed how much of the apparent recovery came from the timing of earlier orders. The margin improvement also reflected several factors rather than a simple recovery of tariff costs.
Caterpillar faced much larger sums. In its second-quarter filing, the industrial manufacturer estimated approximately $2.2 billion in tariff costs for 2026, excluding expected recoveries related to IEEPA duties. Higher selling prices were helping offset part of the increase in manufacturing costs, although the company continued to face pressure from tariffs and other expenses.
Manufacturers can protect their margins by raising prices, but customers may respond by ordering less. Keeping prices unchanged can preserve sales volumes while leaving the company to absorb more of the tariff. The effect on profits depends on both the price charged and the number of products sold.
Some companies have tried to reduce that burden by changing where they buy components or manufacture finished products. A lower tariff can make another country attractive, although the saving may disappear once the company starts moving production.
Changing Suppliers Takes Longer Than Raising Prices
Moving orders to another country can reduce customs duties, but finding a supplier able to produce the same goods at the required volume and quality takes time. Manufacturers may need new equipment, product testing, certification and trained workers before production can begin.
Several companies that moved sourcing away from China have since reconsidered. Reuters reported in September that Target had returned some orders to Chinese suppliers after encountering production constraints elsewhere. Manufacturers also pointed to China’s established tooling capacity, skilled workforce, supplier networks and reliable industrial infrastructure.
The difference in tariff rates remained considerable. Reuters cited July estimates placing the effective US tariff rate on China at approximately 20%, compared with 6.1% for Vietnam, 13.4% for Indonesia and 4.5% for Thailand. Yet lower duties could be offset by equipment costs, freight, energy, quality problems or unreliable deliveries.
Hyster-Yale was also changing its production arrangements, including plans to move certain sourcing and manufacturing activities to the United States. Management expected the changes to reduce costs over time, but warned that the transition would temporarily delay shipment growth.
The company would have to finance those changes while continuing to serve customers and manage existing tariff costs. New machinery, supplier contracts and testing can require cash long before a revised production network starts delivering savings.
During the transition, importers may also hold goods purchased under several different tariff rates. The timing of those purchases determines when higher costs reach the income statement, particularly when products remain in warehouses for months.
Inventory Delays The Earnings Hit
An importer generally includes customs duties in the cost of its inventory. The cash leaves the business when the goods enter the country, but the company recognises the expense through cost of goods sold when it sells them.
Williams-Sonoma, the American lifestyle and furniture retailer, ended fiscal 2025 with approximately $1.5 billion in merchandise inventories, including around $80 million in incremental tariff costs. Management expected much of the associated expense to reach earnings during the first half of fiscal 2026 as the retailer sold the higher-cost goods.
Until those products reached customers, the duties remained tied up in inventory. The company had already paid customs, even though the goods had not yet produced sales revenue.
An importer expecting to recover every dollar through higher prices may still need additional working capital. It pays the duty before selling the goods and may wait longer for customers to settle their invoices. Larger inventories can therefore increase borrowing needs without causing an equivalent permanent reduction in gross margin.
Williams-Sonoma subsequently experienced the reverse effect when certain tariffs were overturned.
Following the February 2026 Supreme Court ruling against IEEPA tariffs, the company collected $200.2 million in tariff refunds and related interest during its second fiscal quarter. It recognised a $167.8 million reduction in cost of goods sold associated with refunds on previously expensed tariffs, together with $6.3 million in interest income.
The refunds also created other obligations. Williams-Sonoma recorded a $47.5 million provision to reimburse suppliers that had previously granted tariff-related concessions, along with a $10 million employee recognition expense connected with the recoveries.
Another $29.3 million of refund income remained deferred against merchandise inventory at the beginning of August. The company expected to recognise that amount through cost of goods sold in the following quarter as the relevant merchandise was sold.
Williams-Sonoma had received the cash, but part of the earnings benefit would appear later. Caterpillar recorded a similar accounting complication, recognising $392 million in expected IEEPA tariff recoveries during the second quarter for claims accepted through the US customs refund process.
Refunds can therefore improve profits in a quarter without any corresponding improvement in customer demand or operating efficiency. Equally, an importer can pay higher duties months before those costs reduce reported earnings.
Share prices may react before either event appears fully in the accounts. Analysts can revise forecasts as soon as management discloses higher import costs or expected refunds, while the financial statements continue reflecting goods purchased and sold across different periods.
Exchange rates can change the cost of those goods before the importer even calculates the customs duty.
Currency Changes The Cost Before Customs Collects The Duty
A US importer buying goods from Europe pays less in dollar terms when the dollar strengthens against the euro, assuming the supplier’s euro price remains unchanged. A weaker dollar raises the import cost before customs adds the tariff.
Birkenstock experienced both tariff and currency pressure during fiscal 2026. The footwear manufacturer produces much of its stock in Europe and sells extensively in the Americas, leaving its reported results exposed to movements in exchange rates as well as import duties.
In the quarter ended March, incremental US tariffs reduced gross margin by approximately 90 basis points, while unfavourable currency translation accounted for another 230 basis points. Adjusted gross margin fell by 310 basis points from a year earlier, despite support from pricing and manufacturing efficiency.
The figures improved in the following quarter. For the three months ended June 2026, Birkenstock reported revenue of approximately €720 million, up 13% on a reported basis and 15% at constant exchange rates. Adjusted gross margin reached 59.2%, compared with 60.5% a year earlier.
Incremental US tariffs accounted for approximately 70 basis points of pressure, while currency translation reduced the margin by another 60 basis points. Better factory utilisation helped offset some of those costs, although changes in product mix also affected profitability. Adjusted EBITDA margin fell from 34.4% to 33.7%.
Birkenstock continued increasing sales, but tariffs and currency movements reduced the profit earned on those sales. The pressure on adjusted gross margin was smaller in June than in March, when adverse currency movements had accounted for a substantially larger decline.
Investors also need to distinguish between the cost of buying goods in a foreign currency and the translation of overseas results into the currency used for financial reporting. A stronger dollar may reduce the cost of euro-denominated imports for a US buyer, while translating dollar revenue into euros can produce a different effect for a European manufacturer.
Both can affect reported margins, alongside product mix, factory costs and changes in selling prices. Without separating those movements, investors may attribute a decline in profitability to tariffs when exchange rates or other operating costs account for much of it.
When Tariffs Reach Earnings And Cash
American Outdoor Brands saw retailers move orders into an earlier financial year, leaving weaker comparisons in the following period and contributing to a stronger reported recovery later. Its gross margin also reflected price increases, product mix and tariff expenses recognised as inventory was sold.
Williams-Sonoma paid duties before the associated goods reached customers, then received substantial refunds before all the earnings benefits had appeared in its accounts. Caterpillar continued forecasting billions in tariff costs while recording expected recoveries from duties imposed under IEEPA.
Birkenstock’s margins moved with currency changes as well as tariffs. Tredegar recovered more of its costs through contractual pricing, while Hyster-Yale expected to absorb part of the increase despite raising prices and changing suppliers.
These companies faced different financial pressures, even when the underlying problem began with a customs duty.
American Outdoor Brands’ sales figures show how early orders can distort growth comparisons. Williams-Sonoma’s accounts show how inventory can delay expenses and refunds, while Caterpillar’s forecasts demonstrate how large the gross tariff bill can remain after management begins recovering costs.
The figures investors need are not confined to the customs charge. They include selling prices, sales volumes, gross margins, inventory levels and operating cash flow, together with any refunds or accounting adjustments that affect reported profits.
A higher gross margin may reflect better products, favourable sales mix or a temporary tariff recovery rather than stronger pricing power. Sales can decline because retailers ordered early, while cash may remain tied up in inventory even after a company has increased its prices.
A tariff can increase import costs immediately, change customer orders before the next reporting period and reduce reported earnings months later. Investors need to establish how much of the cost a company absorbs, whether customers continue buying at higher prices and how much cash remains tied up before the goods are sold.
What To Check In A Tariff-Exposed Company
Can prices rise?
Are customers continuing to buy after the company increases prices? Compare selling-price increases with sales volumes to see whether higher prices are protecting margins or reducing demand.
Can sourcing move?
Can the company change suppliers or production locations without compromising quality, capacity or delivery times? New manufacturing arrangements may reduce tariffs but require additional investment and time.
What is happening to margins?
How much of the additional cost has the company recovered through prices or supplier agreements? Gross and operating margins reflect the combined effects of costs, selling prices and product mix.
What is FX doing?
Are exchange rates increasing or reducing import costs? Currency movements can change the purchase price of goods and the reported value of overseas sales and profits.
When does the tariff reach earnings and cash?
How much tariff expense remains in inventory, and have refunds or accounting adjustments affected profits? Cash can leave the business before the expense reaches earnings, while tariff recoveries can have the opposite effect.
References (APA Style)
1. American Outdoor Brands, Inc. (2026, June 25). American Outdoor Brands reports fourth quarter and full fiscal 2026 financial results. https://www.sec.gov/Archives/edgar/data/1808997/000180899726000030/aout-20260625xexx991.htm
2. American Outdoor Brands, Inc. (2026, September 3). American Outdoor Brands reports first quarter fiscal 2027 financial results. https://www.sec.gov/Archives/edgar/data/1808997/000180899726000045/aout-20260903xexx991.htm
3. Tredegar Corporation. (2026). Tredegar reports first quarter 2026 results. https://www.sec.gov/Archives/edgar/data/850429/000162828026032559/tg-20260331xearningsrelease.htm
4. Hyster-Yale, Inc. (2026, August 4). Hyster-Yale announces second quarter 2026 results. https://www.sec.gov/Archives/edgar/data/1173514/000117351426000201/hyq22026earningsreleaseex99.htm
5. Caterpillar Inc. (2026). Quarterly report for the period ended June 30, 2026 (Form 10-Q). U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/18230/000001823026000046/cat-20260630.htm
6. Reuters. (2026, September 14). Companies left China to dodge tariffs. Now some are heading back. https://www.reuters.com/business/retail-consumer/companies-left-china-dodge-tariffs-now-some-are-heading-back-2026-09-14/
7. Williams-Sonoma, Inc. (2026). Quarterly report for the period ended August 2, 2026 (Form 10-Q). U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/719955/000071995526000208/wsm-20260802.htm
8. Birkenstock Holding plc. (2026). Quarterly report for the period ended March 31, 2026 (Form 6-K). U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/1977102/000119312526220438/birk-20260331.htm
9. Birkenstock Holding plc. (2026). Quarterly report for the period ended June 30, 2026 (Form 6-K). U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/1977102/000119312526347699/birk-20260630.htm
