Major market benchmarks declined on Wednesday after President Trump threatened to impose another $200 billion in tariffs on imported Chinese products, shifting investors’ focus away from the start of corporate earnings season.
American Airlines hits turbulence
Shares of American Airlines fell 8.1% today after the company updated guidance for several key industry metrics.
On one hand, in an SEC filing this morning, American Airlines told investors that total revenue per average seat mile (TRASM) was expected to increase in the range of 1% to 3% year over year, down from its prior outlook for 1.5% to 3.5% growth. The airline also expects average fuel prices for the quarter will land in the $2.24 to $2.29 per gallon range, or roughly $0.06 per gallon higher than previously expected. If that wasn’t enough, it said pre-tax income this quarter will be negatively impacted by $35 million due to an IT issue at a regional carrier that resulted in the cancellation of roughly 3,000 flights last month.
On the other hand, American Airlines also says that cost per average seat mile (CASM) will only increase 2.5%, down from an expected 3.5% increase previously. But with the negatives in the filing easily outweighing the positives — in particular as it pertains to revenue — it was no surprise the stock fell in response.
Idera Pharmaceuticals’ merger is a no-go
To be fair, we should recall that shares of both companies initially plunged after the merger was announced in January, as industry watchers speculated the combination was being made out of weakness. Motley Fool writer Sean Williams warned at the time that securing shareholder approval for the agreement was “no sure thing.”
Sure enough, while a majority of Idera shareholders voted in favor, BioCryst’s shareholders simultaneously voted against the plan at their own special stockholder meeting Tuesday. As a result, BioCryst will pay Idera a $6 million termination penalty, and both businesses will move forward as independent entities.
Restoration Hardware’s tariff trouble
Finally, shares of Restoration Hardware parent RH fell 4.4% as investors worried the home decor retailer will suffer under the effects of President Trump’s plan to escalate the U.S. trade conflict with China. In particular, the aforementioned $200 billion in tariffs he has threatened to impose on Chinese goods would include all furniture imported from the country. And as analysts at Goldman Sachs pointed out in a note to clients Wednesday morning, RH has disclosed that it imports “77% of its dollar volume from Asia, with China constituting the majority of these imports.”
This leaves home-goods retailers like RH in a bind. If they simply absorb the cost of the tariffs, it would have a material negative impact on gross margin. But if they attempt to pass their higher costs through to consumers via higher product prices, they risk losing market share and customer interest in an increasingly competitive industry.