Apple’s Warning Should Worry the Bling Kings
(Bloomberg Opinion) -- Investors have been on high alert for any indication that a changing macroeconomic picture is taking a toll on consumer companies. And now Apple Inc. has sent up just such a flare.
The tech giant slashed its first-quarter revenue guidance on Wednesday, saying recent sales in China had been far below expectations. In a letter to investors, CEO Tim Cook said it was his assessment that the weakness was attributable to a slowdown in the Chinese economy and a chilling effect from the trade dispute between the U.S. and China.
Apple’s revised outlook is, indeed, an important and telling signal about what may be to come for global brands that rely on Chinese consumers for a significant share of their total sales or growth. Still, it’s not the only signal. The bigger picture suggests that the effects of this economic moment in China — and the country’s simmering trade tensions with the U.S. — are going to be patchy.
Nike Inc., for one, provides a counterexample to the woes that Apple described this week. The athletic-apparel company’s latest quarterly earnings report, released late last month, showed a 31 percent sales increase in its Greater China division from a year earlier on a currency-adjusted basis, thanks to strong interest in products like Jordan Max Aura sneakers. In a Dec. 20 conference call with investors, CFO Andrew Campion said, “While there has been uncertainty of late regarding U.S.-China relations, we have not seen any impact on our business.” Investors took down Nike shares by as much as 3.85 percent on Thursday anyway.
Beauty behemoths, too, continue to be buoyed by Chinese consumers. Executives from Estee Lauder Cos. have acknowledged there is a risk of cooling growth in China and have factored that into the company’s full-year guidance. But to date, its China business continues to boom, with sales in its Asia-Pacific division rising 26 percent over a year earlier in the latest quarter on a currency-adjusted basis. L’Oreal SA has also benefited from young Chinese consumers’ demand for upmarket beauty and fragrance.
Like Nike, Estee Lauder was punished Thursday, tumbling more than 3 percent as of midday even though it may not be the most at risk. It’s the giants of luxury fashion that should feel the strongest sense of alarm after Apple’s gloomy announcement. Apple increasingly has been positioning itself as a luxury brand, with prices on its flagship product, the iPhone, creeping higher. And that means it’s caught in the crosscurrents that threaten to end the bling bonanza, led by China, that’s boosted high-end retailers for the past two years.
Chinese consumers, which account for about a third of the global luxury goods sales, have been spending strongly after the crackdown on extravagance a few years ago. This wasn’t likely to continue at the same pace, so some slowdown was inevitable. The risk that this will be a hard landing, rather than a gradual deceleration, looks to be increasing.
Cie Financiere Richemont SA has indicated that above-average growth in China — a catch-up from lean times in 2016 — was now moderating to a more normal level. To be sure, some of the factors that held back Richemont’s Asia-Pacific sales growth in September were one-off, such as typhoons that discouraged tourism. Elsewhere, while LVMH said in October Chinese authorities were stepping up border checks, neither it, nor Gucci-owner Kering SA, saw a slowdown in demand from consumers there. But sentiment can change quickly, and may have already done so by now. Updates from the big European luxury groups in a month or so will be closely watched.
It’s tempting to think of mighty Apple as a bellwether for what will befall the entire basket of consumer companies that rings up big sales in China. That might not be the case. The sting might not be felt in the same way by companies selling smaller-ticket items, such as Nike, or Starbucks Corp., whose ambitious China growth strategy seems more imperiled right now by fierce local competitors than by a reticence to spring for coffee. Investors are right, though, to worry about whether the country’s shoppers will continue to snap up Balenciaga sneakers and Cartier bangles.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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