...This report does not constitute a rating action. Tariffs are a key risk to Sweetwater Borrower LLC's operating performance this year. While its direct imports are limited to its private-label Gator Cases business acquired last year, we believe most of its merchandise is manufactured outside the U.S. The National Association of Music Merchants has cited that China accounts for 43% of the music product industry's imports, and Sweetwater has a similar level of exposure given its broad offering of musical products. We expect it will work to mitigate the impact of tariffs but ultimately face higher costs. Although vendors will likely adjust prices to preserve retail margins, we believe higher prices will weigh on demand. Still, the company's online business model and commission-based sales force result in a more variable cost structure than typical retailers, providing it with greater flexibility to navigate a weaker macroenvironment. In addition, we believe its large institutional business,...
