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Sales at Luxury Brands Could Drop up to 60 Percent if Hong Kong Protests Continue

The overall impact from the Hong Kong disruptions by protesters for luxury firms appears manageable for now, but brands could see a sales hit between 10 percent to 60 percent if those protests continue through the end of 2019.

That’s the conclusion from equities analyst Oliver Chen and his team at Cowen & Co. One key concern is how the political unrest has intensified, paralyzing key parts of the city with flights canceled.

“We view the ongoing turmoil in Hong Kong combined with lower tourism inflow due to the strengthening Hong Kong dollar can be a headwind for our luxury retailers in our coverage,” the analyst said.

One risk factor that could drive the downside further, according to Chen, is if the disruptions continue even beyond 2019. And while there could be potential to offset the decline, that’s only provided that spending shifts to Taiwan, Macau and Mainland China.

“We believe companies with robust presence in Mainland China will feel the least impact from the Hong Kong sales decline,” Chen said. “We favor LVMH within our luxury stock universe, given its diversified portfolio of heritage brands, and robust demand in Mainland China could offset declining sales in Hong Kong.”

According to Cowen estimates, LVMH sees roughly 30 percent of its Asian sales, excluding Japan, come from Hong Kong. That translates to about an 8 percent total sales exposure in Hong Kong when viewed across LVMH’s global distribution network. If Hong Kong sales were to decline between 10 percent to 60 percent on a year-over-year basis, then LVMH’s earnings per share could decrease in the range of 1 percent to 3 percent, Chen concluded.

As for a few other brands that do business in Hong Kong, Chen said Capri Holdings Ltd.’s sales exposure to Asia is relatively small at 4 percent. One big concern, however, is that the company might not have as much flexibility in recouping lost sales in Mainland China.

At Tapestry Inc., its sales exposure to Greater China–which includes Mainland China, Hong Kong, Macau and Taiwan–is roughly 15 percent. Chen estimated that about 25 percent of sales in the region come from Hong Kong. From an overall sales perspective, that equates to just a 4 percent exposure to Hong Kong for the leather accessories firm.

At just a 4 percent exposure to Hong Kong, both Capri and Tapestry could see an EPS decline by 1 percent in fiscal year 2020, presuming continued political disruptions cause the Hong Kong market to fall by 10 percent to 60 percent.