Instead, new tariffs President Donald Trump slapped on some Chinese imports last month and fears that more could come in the escalating trade conflict between Washington and Beijing, had many investors bailing from the sector.
The tensions have hovered as a potential risk for markets for more than two years. But what really unsettled investors in the latest round of earnings calls was retailers admitting that tariffs were starting to bite and how little they had to say on how they could soften the blow.
Best Buy Co Inc and Walmart warned higher duties would put pressure on prices for U.S. consumers, while Macy’s Inc and J.C. Penney Company Inc said their businesses would suffer if tariffs were extended to include apparel and footwear.
Kohl’s Corp said trade tensions were one of the reasons for a cut in its profit outlook and called the situation “fluid.”
“We have been watching this tariff story play out,” said Tony Scherrer, director of research and a portfolio manager at Smead Capital Management. “There doesn’t seem to be in the immediate term (any sign) of things getting any better.”
Many high-end brands have relied on China to boost sales and counter a slowdown in saturated developed markets and it is now by far the world’s biggest market for luxury goods, fueled in particular by young shoppers.
Ralph Lauren Corp has invested heavily, partnering with Alibaba’s TMall, JD.com and WeChat to sell its products and targeting $500 million in revenue in China in five years. Asian sales have risen 18% in the past two years to over $1 billion.
Capri Holdings’ Michael Kors last year had Chinese actress Yang Mi visit their flagship store at Rockefeller Center in New York City for a fan meet-up event and PVH’s Calvin Klein, Tommy Hilfiger and Tapestry Inc’s Coach have all hosted Chinese fashion shows and opened flagship stores in China.
However, with China’s economy growing last year at the slowest pace in nearly three decades and April data pointing to surprisingly weak retail sales, growth of the luxury market globally has slowed by around two percentage points to 6%-8% annually, according to Boston Consulting Group.
CONSUMER SHIFT BACK TO MAINLAND CHINA
Investors are on edge after any signs of a further downturn.
Louis Vuitton owner LVMH’s shares dropped more than 7% in October after it said sales growth in China fell from the high-teens to the mid-teens, dragging shares in Gucci parent Kering SA, Hermes International SCA and Burberry Group PLC.
Stocks have since recovered and some top brands have flagged a pick-up in mainland China, with Vuitton saying last week that demand for its handbags was still at “unheard of” levels.
Spending by Chinese shoppers, however, is increasingly shifting from overseas shopping capitals like Paris or New York back home, encouraged by cuts in import tariffs and other measures by China’s government to boost domestic spending. That trend has in turn dented sales at labels like jeweler Tiffany & Co that are exposed to falls in spending by Chinese tourists to the United States.
WHO CAN WITHSTAND THE TARIFF BLOW?
Until early May, S&P 500 retail companies were outperforming the broad market, up 23% compared with 17.5% for the main index.
Since Trump’s May 5 tweet announcing tariffs would rise to 25% on $200 billion of Chinese imports, they trail by about 2% and the SPDR S&P Retail ETF saw outflows of $162.4 million in May, Lipper flow estimates from Refinitiv show.
Among the most exposed are firms who have poured much of the investment capital worked up in the good times into a near-future that they assumed would be largely Chinese.
Shares of winter jacket maker Canada Goose fell 26% in one day after it reported the first slowing in sales growth in two years, undermining its plan to open three stores in China in the coming years on top of the six it has already.
By contrast, analysts say Target Corp and Walmart are among a few with the scale to force suppliers to absorb part of any tariff-driven rise in costs. Both have been working to trim China’s role as their chief supplier by sourcing products elsewhere.
“Companies that are doing well and indicate they can mitigate tariffs are being rewarded while those that are missing are being doubly punished,” said John Zolidis, president of New York-based investment advisor Quo Vadis Capital.
The SPDR S&P Retail ETF (XRT) was trading at $41.93 per share on Thursday morning, up $0.24 (+0.58%). Year-to-date, XRT has declined -6.93%, versus a 8.77% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Reuters.