China’s uneven recovery may deepen demand worries for US luxury goods makers
US luxury companies including Michael Kors-owner Capri and Estee Lauder will likely record a hit to sales from a slower-than-expected recovery in key market China that likely exacerbated cooling demand in the US.
Global companies, including luxury goods makers, had bet on a surge in demand from China after the country eased strict pandemic restrictions to help counter slowing sales in other parts of the world.
“Everyone had expected China to come back a little bit more strongly in terms of the rebound post-Covid than it has so far. This has clearly led to some need to reset expectations for companies that have a lot of exposure there,” said Raymond James analyst Olivia Tong.
Meanwhile, the world’s top luxury group LVMH last month flagged cooling demand for high-end apparel and accessories in the US as a post-pandemic surge loses steam.
US demand for luxury goods has taken a knock in the past few quarters as wealthy shoppers pause a splurging spree amid still high inflation.
The context
The frail recovery in China has been highlighted by companies ranging from Procter & Gamble to L’Oreal amid record high youth jobless rate and no solid stimulus measures yet to boost domestic consumption.
On Wednesday, the world’s second-largest economy’s consumer sector fell into deflation in July for the first time since February 2021.
“For China, the consumer has been somewhat cautious during the reopening compared to what the American consumer has been,” said Rick Patel, analyst at Raymond James.
Another crucial growth driver for luxury goods makers, travel retail, or sales made at airports or travel destinations, is also yet to recover fully from the pandemic slump.
A “lower guidance (is) likely at Estee Lauder” as spending trends in Hainan – a top travel destination in China – appear softer than expected, Cowen analyst Oliver Chen said, adding he does not expect to see a rapid rebound in the region.
Known for its MAC lipsticks, Estee typically gets about 30 per cent of its annual revenue from the Asia-Pacific region – its second-largest market.
Capri gets a little more than 15 per cent of its net sales from Asia, and the company in May pinned its full-year forecast on “stronger-than-previously-anticipated trends from the reopening of China”.
However, it is not all gloomy for the sector.
Companies, including Ralph Lauren and Coach handbag maker Tapestry, are expected to fare slightly better, thanks to a product assortment that has stuck with consumers in China and the US. REUTERS
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