The number of apparel firms affected by the ongoing coronavirus health crisis in China is piling up.
Burberry Group plc on Friday became the latest luxury fashion firm to disclose that the coronavirus outbreak–which saw 24 of its 64 stores temporarily closed–was having a “material negative effect on luxury demand.” Other brands such as VF Corp. that sell into the region, either through company-owned or partnered doors, also revealed the earnings impact they expect to see from the outbreak.
Despite the near-term warnings by fashion firms over the past week, the companies have all emphasized the temporary nature of the global health emergency, reiterating that China remains a key market and their long-term growth plans remain intact.
On top of the store closures, Burberry said the remaining stores, which are operating with limited hours, have seen footfall fall off. “This is impacting retail sales in both Mainland China and [in Hong Kong]. The spending patterns of Chinese customers in Europe and other tourist destinations have been less impacted to date but given widening travel restrictions, we anticipate these to worsen over the coming weeks,” Burberry said. “We also intend to continue our key growth initiatives in preparation for a recovery in luxury demand.”
Besides the “material negative effect on luxury demand,” Burberry is uncertain about how long the situation will last. That said, “we remain confident in our strategy,” Burberry CEO Marco Gobbetti said. “In the meantime, we are taking mitigating actions and every precautions to help ensure the safety and well-being of our employees.”
The company added that it fully supports the efforts the Chinese government is taking to contain the virus and is working with local authorities.
About “60 percent of VF’s owned and partner stores in China have been temporarily closed due to the coronavirus mitigation efforts. Stores currently open have experienced significant declines in retail traffic,” the apparel corporation said Friday, adding that it is working with local government guidelines to ensure the health and safety of the company’s associates and partners in the communities where they live and work.
“And, while it is not possible to gauge the impact to our supply chain at this point, approximately 16 percent of VF’s total cost of goods sold is sourced directly from Mainland China, of which 7 percent is bound for the U.S. market,” the company said.
“While the coronavirus will impact our financial results in the Asia Pacific region in the near term, VF’s growth opportunity in China and across the Asia Pacific region is significant and the fundamentals of our business are strong. VF is well positioned to navigate the impact of the coronavirus situation given the diversity of our business and operating model in other key geographies,” Steve Rendle, VF’s chairman, president and CEO, said.
The owner of The North Face, Vans and Timberland brands said the Asia Pacific region and Mainland China represent 12 percent and 6 percent, respectively, of total VF revenue in fiscal 2019.
Other fashion firms
Last month, Japan’s Fast Retailing–parent company to Uniqlo–said it has temporarily closed 100 of its fast-fashion stores, or over 10 percent, in China. It operated about 750 stores in across China at the end of 2019, with about 17 located inside Wuhan that closed following a transportation shutdown that kept store associates home. The travel ban also had many mall tenants–such as Muji–closing their stores for the same reason. Restaurant chains such as McDonalds have also been hurt by the travel ban as consumers and store associates are forced to stay home.
With the exception of Burberry and VF, which disclosed their financial reports last month just before travel restrictions were implemented in parts of China, most firms began updating guidance as they were reporting their most recent quarterly results.
Ralph Lauren, Capri Holdings and Tapestry Inc. all reported this past week. Ralph said it closed half its store fleet, and noted that the China situation is still developing. Capri expects to see a reduction in revenue by $100 million in the fourth quarter, while Tapestry foresees lost sales of between $200 million to $250 million.
When it posted third-quarter results on Friday, Canada Goose said the health crisis “has resulted in a sharp decline in customer traffic and purchasing activity.” It also raised questions regarding retail stores in international shopping destinations as Chinese tourists are grounded by global travel disruptions.
Wall Street view
About one-third of total consumption in luxury is estimated to be generated by Chinese consumers, with the composition of sales split between Mainland China and Chinese tourists spending abroad, Cowen & Co. retail and luxury analyst Oliver Chen said.
And while it has been suggested at the start of the outbreak last month that homebound Chinese shoppers could elect to shop at online sites like Tmall, that’s not turning out to be the case. Canada Goose said Friday it has seen reduced sales from the popular Chinese market platform as consumers are “both not shopping in stores or online as much as they were before,” CEO Dani Reiss noted Friday in a call with analysts.
“We believe luxury retailers will likely see sales pressure from lower Chinese tourism in neighboring countries and globally, which may not be fully accounted for in the revised guidance for Tapestry and Capri. Further, Hong Kong has also suffered from lower sales recently and with the outbreak of the virus, we expect sales trends to worsen,” Chen said. “We also think e-commerce sales will be pressured, given logistical challenges with shipping.”