By Trefor Moss
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 8, 2020).
SHANGHAI -- China has long been an important destination for
U.S. companies. In the June quarter, the world's second-largest
economy became a vital refuge for many of them as China's
rebounding consumer economy helped offset the damage from tumbling
sales back home.
In earnings calls for the quarter, senior executives from some
of America's best-known brands singled out China for salvaging what
otherwise was a rough three months.
"China offered a model of recovery, stabilization and then
growth," David Weinberg, chief operating officer of Skechers USA
Inc., told analysts on a late July earnings call. Overall, the
sneaker company's quarterly sales dropped 42% from a year earlier
but were bolstered in part by 11.5% growth in China.
Chinese retail sales rebounded more strongly in the
April-to-June period than most analysts had been predicting earlier
in the year, falling just 3.9% from the same time last year. That
compared with a much steeper 19% drop in the first quarter, when
large parts of China were locked down to prevent the spread of the
coronavirus. U.S. retail sales, by comparison, declined 8.1% in the
second quarter in year-over-year terms, according to the Census
Despite rising political tensions between Washington and
Beijing, American brands have suffered little commercial fallout
among Chinese consumers, enabling them to capitalize on the
economic rebound in China.
The gulf between China and the rest of the world was widest in
the luxury sector. For LVMH Moët Hennessy Louis Vuitton SE, China
was "a very good offset for the rest of the business, which is
suffering," Chris Hollis, the head of investor relations, said on
his company's earnings call. While LVMH revenue fell 38% year over
year in the April-to-June period, China jumped 65%, a surge driven
by Chinese luxury consumers trading foreign shopping sprees for
local buying runs because of travel restrictions.
Gucci owner Kering SA reported similar results: Quarterly sales
at its luxury brands fell 43% year over year but increased by more
than 40% in China.
With the virus largely under control in China, many analysts
expect retail sales to return to yearly growth in the third
quarter, even as the U.S. and other Western countries struggle to
control new outbreaks and fully reopen their economies. The
Economist Intelligence Unit had said as recently as April that
Chinese retail sales wouldn't grow again before 2021; now it
forecasts 1% yearly growth this quarter, followed by 2.4% growth in
the final three months of the year.
Though consumption has rebounded, headwinds remain in China.
Unemployment levels, which surged to a record high earlier this
year, are tapering off, but the jobs being created are mainly
low-paying and temporary and aren't boosting people's spending
power, said Dan Wang, an analyst at the EIU. She predicted that the
damage to income is likely to serve as a longer-term drag on some
In addition, three consumer categories remained in negative
territory in June, compared with a year earlier: restaurants and
cafes, autos, and clothing and footwear, down 15.2%, 8.2% and 0.1%,
Starbucks Corp. suffered a 19% drop in quarterly China sales in
the second quarter -- though that still compared favorably with the
coffee chain's 38% decline in global revenue. The company's chief
executive, Kevin Johnson, said he was optimistic Starbucks would
substantially recover its sales in China by the end of 2020.
McDonald's Corp. struck a more downbeat tone on the prospects of
a rebound. "In China, after early signs suggesting a solid
recovery, our pace of improvement has slowed, as customers remain
wary of social activities," said CEO Chris Kempczinski, who
predicted the subdued pattern would likely stretch into next year.
McDonald's global revenues declined 24% year over year in the June
quarter; it didn't break out results for China.
Yum China Holdings Inc., which chiefly operates KFC restaurants
in the country, said revenue fell 11% in the quarter from last year
and said recovery was uneven, with affluent east-coast markets
bouncing back more strongly than other parts of China.
Restaurants in China are unlikely to recover their losses this
year, said Ms. Wang, of the EIU. Those in commercial districts are
likely to struggle as white-collar workers shift to working from
home, she said.
In clothing and footwear, higher-end brands managed to fare
Lululemon Athletica Inc. said its China sales grew by
single-digit percentage points in April and in recent weeks had
been increasing by more than 20% compared with a year earlier. CEO
Calvin McDonald didn't give a quarterly figure for China, though
global revenue fell 17% year over year.
Nike Inc. also returned to growth in China in its most recent
quarter, which ended May 31, as China sales rose 1% from a year
earlier -- helping offset a global revenue decline of 38%. The
increase in China in the quarter included strong double-digit
growth in May, said Matthew Friend, Nike's chief financial
Under Armour Inc. didn't break out China numbers, but it pointed
to a more muted recovery. "The customer is hesitant," CEO Patrik
Frisk said, referring to China. "Traffic levels are still not back
to where they were before."
While overall auto sales in China haven't fully recovered, Tesla
Inc. was able to capitalize on demand for its locally produced
Model 3 sedan. The Palo Alto, Calif.-based electric-vehicle maker
more than doubled its unit sales in China in the first half of the
year to 48,384 vehicles, according to data provider LMC Automotive.
The company's surge in China was key to its achieving a
second-quarter profit of $104 million, despite its U.S. plant being
shut for a chunk of time.
Toyota Motor Corp. said Thursday that the rebound in China had
created optimism the company could deliver profit of nearly $7
billion this year, despite the pandemic. The Japanese auto maker's
China sales grew 23% in June from a year earlier and were down 2%
for the virus-affected first half of the year.
Apple Inc. reported 2% revenue growth in China in the most
recent quarter, though unlike that of many of its fellow U.S.
companies, the result compared poorly with its global performance
of 11% growth in the April-to-June period.
Write to Trefor Moss at Trefor.Moss@wsj.com
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August 08, 2020 02:47 ET (06:47 GMT)
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