Hermès, Tapestry Echo Chinese Economic Trends in Earnings Reports

Luxury brands’ recent earnings reports have been mostly positive, with companies like Estée Lauder Companies Inc., Burberry, and LVMH Moët Hennessy Louis Vuitton (LVMH) showing significant sales increases thanks to Chinese consumers. But mixed in with these reports, the industry is also seeing repeated reminders that China’s economy is slowing down and that Chinese tourists are shopping less. In another round of earnings releases on Friday, those economic trends and predictions were once more reiterated. The French luxury handbag brand Hermès and the New York City-based multinational luxury holding company Tapestry each repeated talking points that similar companies have voiced over the last several months. Both corporations reported overall sales growth and growth in China (although Tapestry did note a slowdown in Chinese tourist sales). Coach, which is one of the brands owned by Tapestry, has seen “increased traction with Chinese consumers globally driven by domestic demand, partially offset by a decline in tourist spend,” according to its earnings release. Meanwhile, Hermès said its sales in China benefited from the brand’s expansion and store renovations in that country as well as the October roll-out of its new China-based digital platform. "We are still growing strongly in Asia, we did not see any change in momentum in our stores in China," said Hermès CEO, Alex Dumas. But compared to these Western companies, the Japanese personal care company Shiseido got an even bigger boost from consumers in China in 2018, with sales increasing 32 percent year-on-year — a big jump from the previous year’s 20 percent growth rate. The company’s sales in China grew at a similar pace of 33 percent year-on-year in Q4. Meanwhile, the company’s travel retail segment did so well that it could be seen as a relative outlier among brands that rely on Chinese tourist spending. That segment's saw sales grew 40 percent from the previous year, although its Q4 growth rate was slightly less robust at 27 percent. Aside from its close proximity to mainland China, Shiseido also likely saw a sales boost from the “lipstick effect” — where consumers in a recession are more willing to buy less expensive luxury items — that helped Estée Lauder Companies last quarter amid China’s slowing economy. These earnings were released against the backdrop of the ongoing U.S.-China trade negotiations, for which optimism is waning as reports now claim that a Xi Jinping-Donald Trump meeting looks unlikely before the imposed March 1st deadline. “Right now, because the trade talks have not quite reached an agreement, the sentiment in China is relatively weak,” said SoHo China CEO, Zhang Xin, in an interview with Yahoo Finance earlier this week. As more fashion and beauty brands report their earnings for the final quarter of 2018, investors will start to have a clearer picture of exactly which companies are better positioned to ride out China’s cooling tourist economy. One thing is certain, however: Companies that rely heavily on Chinese tourists shopping abroad will have to re-evaluate their strategies this year.

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Hermès, Tapestry Echo Chinese Economic Trends in Earnings Reports