The pro-democracy protests in Hong Kong look like they are going to drag on for some time. According to a new industry report from equity research firm Sterne Agee, this means trouble for Hong Kong retailers and international retailers with significant exposure there. The report notes that the hit to retail sales is likely to be especially large as the protests are happening during the Golden Week holidays, one if the busiest shopping times of the year in Hong Kong.
Protests hurting tourism, which also hurts retailers
The SA report highlights that the main source of traffic in Hong Kong’s shopping districts is tourism from Chinese, which is likely to be impacted as the impetus for the protests is the mainland government’s trying to restrict the voting rights of Hong Kong citizens.
Carlson Capital's Double Black Diamond fund added 3.09% net of fees in the second quarter of 2021. Following this performance, the fund delivered a profit of 5.3% net of fees for the first half. Q2 2021 hedge fund letters, conferences and more According to a copy of the fund's half-year update, which ValueWalk has been Read More
The lack of VAT and duty costs in Hong Kong relative to China adds up to 35-40% discount on similar products. Analysts Ike Boruchow and Tom Nikic recently visited HK, and noted many of the high end retailers with whom they spoke said up to 90% of their business comes from mainland shoppers. Local mall operators estimated that 60% of their daily sales comes from Chinese tourists. Of note, outbound tourism from the mainland has been increasing at the rate of around 15-20% a year, and an estimated 97 million residents traveled abroad last year, with Hong Kong as the number one destination representing 65% of travel abroad.
Global retailers with Hong Kong exposure
Tiffany & Co. (NYSE:TIF) has nine Hong Kong locations which represent 13% of Asia-Pac (ex-Japan) store base, 3% of the firm’s global base. Boruchow and Nikic have lowered their Q3 Asia-Pac segment comp to +1% from +4%, and reduced both fourth quarter 2014 and first quarter 2015 to +5% from +7%. In addition to the slower Asia comp growth, after adjusting for a weaker euro and Yen, their Q3/FY14/FY15 EPS estimates are notched down to $0.73/$4.28/$4.74 from $0.75/ $4.32/$4.82.
Coach Inc (NYSE:COH) operates 20 stores/concessions in Hong Kong, which represent 13% of China store base and 2% of global base. The SA analysts also reduced their China sales growth rate to 12% from 15% for the second and third quarters of 2015. Their Q2/FY15/FY16 EPS estimates are also brought down to $0.60/$1.83/$1.91 from $0.61/$1.84/$1.92.
Kate Spade & Co (NYSE:KATE) owns seven stores/concessions in Hong Kong that add up to 7% of international store base and 3% of the firm’s global base. Boruchow and Nikic reduced their global comp estimate by one point in Q4 to 9-10% and in Q1 to 14%. They also took their Q4/FY14/FY15 EPS estimates down to $0.23/$0.25/$0.62 from $0.24/$0.26/$0.63.
For Fossil Group Inc (NASDAQ:FOSL), Hong Kong accounts for around 5% of Asia wholesale revenues, 2% of DTC sales and ballpark 1.5 to 2% of consolidated sales. Sterne Agee reduced Asia wholesale organic growth by one point in Q4 and Q1 (now 11% for both quarters) and sliced DTC comps by 50bps to -0.5%. After adjusting for the weaker euro and yen, our Q4/FY14/FY15 EPS estimates for Fossil are adjusted downwards to $2.91/$6.92/$7.40 from $2.95/$6.95/$7.50).