By Inti Pacheco and Theo Francis
When Apple Inc. said China's slowing economy contributed to its
late-year sales slump, the news rattled the stocks of other major
U.S. companies with big operations in the world's second-largest
economy.
Now, as U.S. companies prepare to report their quarterly
earnings, China's impact will be revealed. The amount of damage is
likely to depend on such factors as who the company's customers are
and how much competition it faces in China.
Take Starbucks Corp. and Nike Inc. The coffee chain, which faces
relatively stiff competition in China, has warned of slow growth in
the country, while the sneaker maker, which doesn't, just reported
big gains there. Some companies that are heavily exposed to the
country, like chip maker Texas Instruments Inc., may prove less
vulnerable because their customers are primarily Chinese
manufacturers rather than consumers. Conversely, companies don't
have to sell directly to China to take a hit -- makers of watches
and other luxury products, for instance, rely on spending by
Chinese tourists in Europe, Japan and the U.S.
China's manufacturing sector has declined since late 2017
because of lower private-sector investment, and in the fourth
quarter revenue growth slowed or stagnated in every sector,
according to China Beige Book, which collects and analyzes data on
China's economy. Last year's growth likely got a boost from a rush
of orders by companies seeking to dodge new tariffs imposed as part
of the U.S.-China trade dispute.
Retail sales growth slowed in November to the lowest level in 15
years, and Chinese consumers have begun putting off major
purchases, recent data showed.
"Now we're entering a worse time," said Leland Miller, chief
executive of research firm China Beige Book International. "The
slowing economy and headwind from the trade war have created a much
gloomier environment."
U.S. companies competing in China's consumer markets tend to
target wealthier customers, where the slowdown is more pronounced,
said Brad Setser, a senior fellow at the Council on Foreign
Relations who was deputy assistant Treasury secretary for
international economic analysis in the Obama administration.
"I certainly expect other companies that sell to the top end of
the Chinese consumer market to be under a bit of pressure," Mr.
Setser said. "Every indicator in China has been below
expectation."
More than a third of S&P 500 revenue is generated outside
the U.S. -- and about 10% comes from developing economies, of which
China makes up a big part, economists say.
China looms larger for some companies. Of the 25 companies in
the S&P 500 that disclosed China-specific sales for the
September quarter, eight of them said the country contributed at
least 20% of revenues. Apple reported about 20% of its sales came
from China in its most recent fiscal year, ended Sept. 29, while
Nike sold $1.5 billion of goods in the country in the quarter ended
Nov. 30, or about $1 in every $6 of its total revenue.
Apple Chief Executive Tim Cook has said he believes the slowdown
was sharpened by trade tensions between China and the U.S. but that
he is now optimistic about the two countries reaching an agreement
that will benefit both economies.
Many of the companies disclosing the biggest reliance on China
revenue are manufacturers, where sheer volume may prove a poor
measure of vulnerability. Component makers, for example, could sell
primarily to Chinese manufacturers, which then sell finished
products around the globe, not just to Chinese consumers.
Chip maker Texas Instruments said in its latest annual report
that many of its exports fall into that category. The company
reported nearly half of its third-quarter sales from China. It
didn't respond to a request for comment.
U.S. brands like Victoria's Secret owner L Brands Inc. and
Tapestry Inc., which sells Coach and Kate Spade handbags, have been
expecting slower growth in China, said Cowen retail analyst Oliver
Chen. "It's a tougher environment for hard luxury," Mr. Chen said.
L Brands and Tapestry declined to comment.
Starbucks, which is going up against rapidly growing domestic
coffee chains, has warned that comparable sales will likely grow at
its more than 3,600 stores across China by 1% to 3% this year. That
is at the low end of recent years, and slower than U.S. growth
forecasts.
Starbucks officials say its China stores are profitable and the
company is focused on adding locations in the country. "We've
always played the long game in China," a company spokesman
said.
Nike reported strong sales growth in China last year, rising 31%
year-over-year in the most recent quarter, excluding
currency-conversion effects. "We continue to see very strong signs
of momentum in China," Chief Financial Officer Andy Campion told
analysts in a December conference call.
One likely factor: Its shoes, while priced at a premium, are
still cheaper than iPhones, and appear to be faring better against
the kind of domestic competition that Starbucks faces, said John
Zolidis, a consumer-sector analyst with Quo Vadis Capital. That,
along with the company's marketing, may shelter Nike from
belt-tightening by Chinese consumers.
In the end, companies coming off strong 2018 results and facing
slower growth around the globe have an incentive to be cautious in
discussing upcoming results, said Joe LaVorgna, chief economist for
the Americas at Natixis, a unit of French bank Groupe BPCE.
"My guess is, what Apple did will be the blueprint for many
other companies," Mr. LaVorgna said. "Caution is going to pervade
the landscape."
Write to Inti Pacheco at inti.pacheco@wsj.com and Theo Francis
at theo.francis@wsj.com
(END) Dow Jones Newswires
January 14, 2019 05:44 ET (10:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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