Global economic turbulence could be lifting some apparel and retail stocks at the expense of others.
Speaking with CNBC, Wells Fargo Securities senior analyst Ike Boruchow said investors in his group are seeking out “safe havens” like off-price darlings TJX and Ross, and dollar-store leaders as many multinational apparel and luxury brands are buffeted by what appears to a significant slowdown in what used to be everyone’s favorite growth opportunity: China.
New data shows a contraction in China’s manufacturing sector amid a broader growth slowdown in many of the world’s biggest economies, Bloomberg reported. And now, Reuters is reporting that China’s central bank took the serious measure of slashing the reserves that banks are required to keep on hand, making $116 billion available for additional lending in an effort to ameliorate a sputtering economy. That decision, CNBC anchor Melissa Lee said, indicates that China is “admitting” there are cloudy skies ahead.
“China seems to be rolling over,” Boruchow added.
Noting that share prices for multinationals have “meaningfully underperformed” their domestic peers in recent months, Boruchow told CNBC athletic companies like Nike and Lululemon Athletica seem to be “bucking the trend” though the luxury sector—increasingly dependent on China in recent years—“is a different kind of animal.”
The government-led crackdown on daigou, or the practice of surrogate Chinese shoppers purchasing abroad for people back home, is a significant factor in what jewelry leader Tiffany’s described as a “meaningful decline” in revenue from its Chinese customers, Boruchow said. Though just 8 percent of Tiffany’s business stems from its footprint on the Chinese mainland, Chinese customers contribute 30 percent of its turnover, he added.
“It’s not that China is a huge percent of revenue,” Boruchow explained.
Continuing, he said, “China’s been a big opportunity,” as major players like PVH and VF Corp. “started to go after China in a big way” by bringing their licenses in house and investing in full-throttle strategies.
“It’s not just a sales slowdown” that the industry is concerned about, Boruchow noted. “Profits are tough there to begin with.”