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Luxury Stocks Tumble as China Seeks Undeclared Vuitton Bags

Chinese border guards searching travelers’ suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years.

Shares of some of the biggest brands, from Prada SpA to Shiseido Co., tumbled across the globe on signs that Chinese officials are cracking down on travelers returning from places like Paris, London and Tokyo loaded with high-end merchandise.

The stricter scrutiny is adding to fears of a slowdown in spending by China’s consumers, who account for two-thirds of the luxury market’s growth. Luxury investors were already skittish, as the effects of the U.S.-China trade war threaten a three-year spending boom.

“Spending on luxury goods by traveling Chinese shoppers in overseas markets could slide on concerns of increased scrutiny by customs authorities,” said Bloomberg Intelligence analyst Catherine Lim on Thursday. “This may hurt sales in country of origin for branded goods in popular categories such as cosmetics and bags.”

Shares of Louis Vuitton owner LVMH extended losses for a second day Thursday, losing as much as 3 percent after tumbling the most since 2008 the previous day. Gucci owner Kering SA dropped as much as 4.3 percent. Rivals Tiffany & Co., Michael Kors Holdings Ltd. and Coach owner Tapestry Inc. were also routed Wednesday.

The sell-off spread to Asia on Thursday. Prada tumbled 10.5 percent in Hong Kong, the biggest drop in more than a year. Japanese cosmetics company Shiseido slid 6.7 percent for its largest decline since February. In South Korea, LG Household & Health Care Ltd. and Amorepacific Corp. tumbled more than 6.8 percent.

Terry Hong, an analyst at Guotai Junan Securities Co., played down the significance of the border crackdown, noting that such actions have been happening over the past two years. The broader global market sell-off and concerns over China’s slowing economy are also impacting the sector. The tariff spat with the U.S. is dragging on China’s growth, with factory activity in retreat and the yuan sliding.

“The luxury brand shares are usually hit the most amid the depressed sentiment over the slowdown in Chinese consumption,” he said. “Investors are likely overreacting on negative news when the market is weak.”

Here’s a look at how some of the biggest names in luxury are faring:

Inside LVMH

LVMH on Wednesday confirmed speculation—which surfaced on social media last week— that Chinese officials are cracking down on travelers returning with luxury goods. Some of those items are sold at a profit when shoppers return home, undercutting the luxury companies’ own, higher-priced stores in Beijing or Shanghai.

“The Chinese authorities have some laws that are being enforced with some more strength at times, which is what we’re seeing now,” LVMH Chief Financial Officer Jean-Jacques Guiony said on a call with analysts.

China’s customs administration did not immediately respond to a faxed request for comment on tightened security checks on travelers. China’s foreign ministry spokesman, Lu Kang, said he’s not aware of any crackdown on luxury goods and would need to look into it when asked about Guiony’s remark at a briefing with reporters Thursday.

The shares fell even after the company the prior day reported a quarterly sales increase in line with analysts’ forecasts. Growth in the Louis Vuitton brand’s sales to Chinese customers slowed slightly, to a percentage in the middle teens, in the third quarter, Guiony said.

Asian Connections

Chinese tourists flock to destinations including Seoul and Tokyo to stock up on cosmetics and handbags, especially at airport duty-free shops. An easing of political tensions between Seoul and Beijing over the past year has helped draw more Chinese tourists to South Korea. Increased purchases by Chinese shoppers in Japan should account for more than half of Shiseido’s sales of higher-profit luxury cosmetics, Bloomberg Intelligence’s Lim wrote in August.

Hong Kong-listed Prada, meanwhile, has been seeing growth as a turnaround push is bearing fruit, as it has belatedly joined in on the China-led luxury rebound.

“The brands that this hits the most are the most recognizable,” said Simeon Siegel, an analyst at Instinet LLC. “It’s the brands that are worth buying because of the logo.”

Other European Brands

Other European brands, each with exposure to Chinese tourism, felt the impact of investors’ concerns as well, because of their popularity among Asian shoppers.

Kering—which owns numerous high-end labels including Gucci, Saint Laurent and Alexander McQueen—has expressed concern about foreign tourism in Western Europe, which it said hurt sales at Bottega Veneta last quarter. The stock fell 9.6 percent on Wednesday.

Richemont—parent company of Cartier, Piaget and Van Cleef & Arpels—also extended declines for a second day falling as much 3.6 percent Thursday, while Burberry slid 2.69 percent. It warned in July that tourist numbers in its domestic U.K. market were falling.

U.S. Labels

U.S. flagship shops and outlet malls have long been magnets for international tourists looking to stockpile American brands and bring them back home.

Though the days of tourists stuffing suitcases full of Abercrombie & Fitch shirts and Levi’s jeans are largely gone, foreign visitors remain a significant source of sales. Chinese tourists still purchase many American fashion labels that are viewed as aspirational with a worldwide presence.

The Tiffany flagship in New York, for example, is visited by millions of tourists each year and accounts for as much as 10 percent of the company’s annual global sales. News of the crackdown drove its shares down as much as 10 percent.

Tapestry fell as much as 8.5 percent on Wednesday. Last year, Tapestry executives expressed concern about Chinese tourist traffic prior to the holiday shopping season. Michael Kors fell as much as 7.3 percent. Kors, which is renaming itself Capri Holdings as it acquires Gianni Versace SpA, plans to grow its new business into a $2 billion brand by courting Asian consumers, including China’s middle class.