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When Donald Trump won a decisive victory in the 2024 presidential election last month, executives at Stanley Black & Decker knew they had a problem on their hands. In fact, as soon as the results became known, the tool company began having conversations with key channel partners about what to do next, CEO Patrick Hallinan said at an industry conference last week. Wall Street was worried, too. The day after the November 5 election, the club’s Stanley Black & Decker shares fell almost 2%. Trump was declared the winner in the early hours of November 6th. Since then, the stock has fallen more than 11% compared to the S&P 500’s gain of more than 6%. The market reaction, however, has little to do with anything Stanley Black & Decker has done, but rather the tariffs proposed by the incoming administration. Trump has threatened to raise tariffs on Chinese imports to 60% and tariffs on Mexican and Canadian products to 25%. Stanley Black & Decker, founded in 1843 as the Stanley Works, is one of thousands of companies exploring strategies to offset the kind of pressure that rising tariffs would bring. Some management teams have wanted to move production to other countries. Others are cutting costs to offset potential hits to sales and profits. Constellation Brands CEO Garth Hankinson said his team is adjusting its inventory to anticipate increases in Mexican import tariffs. Constellation, the Mexican brewer of Corona, Modelo and Pacifico, is also a holding in Jim Cramer’s Charitable Trust, a portfolio used by the CNBC Investing Club. Goldman Sachs chief industry analyst Joe Ritchie described Stanley Black & Decker as the “poster child” for the companies he covers if the tariffs become policy. That’s because about 25% of Stanley’s tool and outdoor segment’s U.S. cost of goods comes from China. Because labor and property are cheaper in the world’s second-largest economy, large companies like Stanley Black & Decker have historically moved production there to save money. But the tides have been changing – first, when supply chains out of China were disrupted during Covid; and now, to prepare for the planned tariff increases. Stanley Black & Decker said the magnitude of Trump’s proposed payouts could squeeze the company’s profits, knocking $200 million off annual operating income. This forecast, however, does not take into account the actions that the company can take to reduce the impact. “They had to come up with a number to give the market a sense of what it might be or else the market was going to figure it out on its own, which is never a good thing,” Ritchie told CNBC in an interview last week. at the annual Goldman Sachs Industrial and Materials Conference in New York City. SWK mounts YTD year-to-date performance Stanley Black & Decker (SWK) At the conference, Hallinan reiterated the company’s forecast and outlined a strategy for navigating potential headwinds during the next four years of Trump’s presidency. The plan is threefold: repositioning supply chains, shifting production away from China, and raising product prices to offset the company’s additional costs. “We will have to continue to reduce our exposure to the Chinese market in the US market,” the CEO told attendees. “Regardless of what administration is involved, we would follow this route.” He added that the proposed tariffs, however, only “accelerate that pace”. That won’t be a quick trip. It could take 12 to 24 months to see the material impact of supply chain changes, Stanley Black & Decker said in a securities filing earlier last month. However, management continues to reiterate its view that long-term adjusted gross margins could reach or exceed 35%. As for the price increase, Hallinan said owner DeWalt and Craftsman are discussing the results with these supply chain partners. Although not mentioned by Hallinan last week, Stanley Black & Decker’s supply chain partners include big-box retailers such as Lowe’s and Club holding Home Depot, which sell the company’s products. The CFO added that Stanley’s priority is to work “in a proactive, transparent and direct way (with them)”. Raising prices with these channel partners, Ritchie said, is no easy task. “It’s really difficult to negotiate prices with companies like Home Depot and Lowe’s, especially given the impact of the pandemic hangover,” said Ritchie Goldman, managing director of Goldman’s US Industrials and Materials business unit. “During the pandemic, a lot of people did home improvement projects…which led to a lot of demand for their products. And because of that, their business outlook has been very muted post-pandemic.” But this isn’t Stanley Black & Decker’s first rodeo with higher tariffs on imports. After Trump first imposed Chinese tariffs in 2017 and 2018, management said its original uncapped exposure was more than $300 million. As a result, the company began to change its supply chain and increase prices, which helped reduce the gross impact to less than $100 million annually and offset the rest to completely neutralize the annual impact. “The reality is they have a playbook of rates today that they didn’t have when they were first implemented,” Ritchie said. With all that in mind, here’s where we stand on the stock going forward. Last week, the Club took the tough decision to downgrade our Stanley Black & Decker rating to 3, meaning we intend to sell at any strength. From a portfolio management perspective, it makes sense to reduce our rate risk before Inauguration Day in January. At the same time, however, we don’t want to lose exposure to the home improvement issue because housing sales are at a 30-year low and pent-up demand will be released when mortgage rates drop. That’s why the Club plans to clear Stanley Black & Decker and use those future sales profits to get bigger at names like Home Depot. (Jim Cramer’s Charitable Trust is long SWK, STZ, HD. See the full list of stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim will wait 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS PURSUANT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, SUBJECT TO OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR OBLIGATION SHALL BE CREATED, OR CREATED, FOR ANY INFORMATION ENTERED INTO WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Stanley Black & Decker power drills are for sale at a Home Depot store in Colma, California.
David Paul Morris | Bloomberg | Getty Images
