Hasbro is already paying for Trump's threatened tariffs on Chinese toys

• Hasbro is already paying the price for Donald Trump's threat to extend tariffs to virtually all Chinese goods including toys.
• The toy giant stomached extra costs last quarter as it increased its US inventory and boosted production outside of China.
• Hasbro predicts the tariffs would raise its shipping and warehousing costs, alter its tax rate, shift its retail customers' ordering patterns, and drive up toy prices for consumers.
• Watch Hasbro trade live.

Donald Trump has only threatened to extend tariffs to virtually all Chinese goods, but Hasbro is already paying for the president's game of Risk.

The toy giant behind Nerf, Play-Doh, and Monopoly stomached additional costs last quarter due to the "exhaustive amount of work" needed to prepare for the "very challenging and damaging impact" of tariffs if they're imposed, CEO Brian Goldner said on the second-quarter earnings call this week.

The proposed import duties have "far-reaching implications" and would be "very disruptive to our business and consumers," finance chief Deborah Thomas added.

The US and China have resumed trade talks, but Trump recently said that tariffs on another $325 billion worth of Chinese goods are still an option "if we want."

Hasbro's inventories, tax rates, revenue patterns, manufacturing footprint, and toy prices could all be affected if they're imposed, Thomas said.

The toymaker's US inventory and warehousing expenses both grew last quarter as it shipped in more products than planned to insulate itself from the feared duties.

Shipping and warehousing costs would rise if tariffs are imposed, Thomas said, potentially raising overall costs, eroding income, and altering Hasbro's tax rate.

Hasbro's retail customers, who have the choice of taking ownership of Hasbro's products in the US or ordering them directly from contract manufacturers, are already changing their order patterns. Last quarter, "Some retailers briefly paused their direct import orders and all are watching it closely," Thomas said.

She predicts direct orders this year will account for less than the 35% of US and Canada revenue they generated in 2018.

"Tariffs would essentially eliminate this program for items being produced in China," Thomas said. As a result, more retailers would take ownership of products later, shifting Hasbro's revenue patterns.

For example, retailers that previously placed direct orders in the fourth quarter for products to sell in the first quarter, might now take on products in the first quarter, depressing Hasbro's fourth-quarter shipments.

Hasbro also accelerated its efforts to diversify its manufacturing footprint last quarter, meaning it incurred additional costs. More than two-thirds of Hasbro products sold in the US last year came from China, Thomas said.

The company plans to lower that to 50% by the end of 2020 by producing toys in India, Vietnam, and elsewhere.

While Hasbro is paying for tariffs now, consumers will end up footing the bill as neither toymakers nor retailers will be willing to sacrifice their margins, Thomas said.

"The unfortunate thing with tariffs," she said, "is the consumer is ultimately going to feel that price pressure because of the cost to react to it."