When you hit a speed bump at 15 miles an hour, your car makes that little bumpy noise and you think about getting your CV joints inspected. When it hits the same bump at 120 miles an hour, you take your bumper home in a sandwich baggy.
It's not surprising that a new report on the growth of Chinese retail sales for the first two months is having an effect on fast-moving retailers with operations in the country. Michael Kors , Coach , and Fossil are all exposed to China, and each faces a separate problem if sales stay low.
Slowdown in Chinese sales
Taking industrial output as the signifier, China is having the worst start to a year since 2009. The company increased output by 9.9%, compared to 10.3% in December of last year. That decrease in the rate of production was layered on top of an increase in inflation, which rose 3.2% in January, driving up the cost of food and hitting its highest point since April 2012. Those issues combined to push sales growth down to 12.3% -- analysts had been expecting 15%.
The worrying part of the equation for investors -- because 12.3% growth isn't exactly bad -- is that the slowdown may continue. Analysts are starting to detect a pattern in China, one of investment-driven growth with lagging consumption growth. That's clearly bad news for companies that are trying to sell things in China. That bad news may be amplified by a downturn in lending, with signs pointing to a shorter leash in the hands of the central bank.
What it means for investors
The market is worried that Kors is going to get sunk on a slowdown. Shares were down 5% yesterday, which is only adding to the woes of Kors' investors, who have seen the stock flounder over the past month. But it's not all bad news in China. The company recently came out on top of a study of online brand demand in China, with handbags taking a full 51% of searches for fashion items. Kors has said that there's a lot of growth potential for the brand in the region. Right now, it operates 65 stores in that part of the world, and CEO John Idol has said that the company plans to expand that up to 150 stores .
A slowdown in China is not going to be the end of the line for Kors. It is expanding everywhere and had 41% comparable-sales growth in the U.S. last quarter and 58% growth in Europe. The news isn't great, but I'd be surprised if it translated into anything meaningful in three months. The brand is simply too strong right now to be damaged by minor macroeconomic headwinds.
Coach and Fossil are in slightly different places. Coach is already heavily invested in China, operating 117 stores as of January with a plan for another 10 in the near future. The company gets about a third of its total revenue overseas, and growth in China has been a big driver of that. Last quarter, sales were up 40%, driven by a double-digit comparable-sales increase. But while Kors has the benefit of being the hottest thing in town, Coach is still working at gaining share.
Coach is spreading itself out, expanding into men's and non-bag accessories in all its markets. In China, it's hoping that the expansion of its footprint and its new lines drive $400 million in revenue in the coming year. There's a lot riding on that growth. Sales in the U.S. lagged a bit last quarter, and the only thing keeping everyone's chins up was the strong international showing. A slowdown in China could mean that that buffer shrinks or disappears, which would put a lot of pressure on an uptick in the U.S.
Fossil is in a similar boat, with North American and European sales doing well but not as well as sales in China. The company is also expanding its footprint, but is doing so in a way that it admits is fragmented. That's caused the expansion to take longer than planned and hurt profitability. As a result, Fossil really needs to show some strength in the Asian market. Luckily, it is going to be helped by the fact that it's working with Kors as the brand's official watch provider.
The bottom line
Kors, Coach, and Fossil all have money on the line in China and a slowdown is going to hurt. Having said that, the slowdown isn't yet large enough to spell disaster and all of these brands have the strength to weather a small storm. If the trend continues, though, I'd start to be worried about long-term growth and for Fossil, about the time frame for real profitability. Overall, I think Kors is best placed, but its high P/E makes it a high-stakes bet.
Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's new premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.
The article China's Retail Sales Growth Slows originally appeared on Fool.com.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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