Concerns that China’s postpandemic recovery may be stalling haven’t spread to Chinese consumers yet.
First-quarter earnings results from consumer-facing companies operating in China suggest that the uptick in spending that companies have long been waiting for has finally arrived, as Chinese shoppers settle into a new normal.
Chinese retail sales have been making a gradual comeback, growing steadily over the past five months. April’s retail sales jumped 18.4% year-over-year, up from November’s 5.9% decline, according to the National Bureau of Statistics of China. Consumer confidence has also ticked up from its lows in the fall. Gross domestic product (GDP) for the first quarter of 2023 rose 4.5%, above economists’ expectations.
Indeed, for some Western retailers, the quarter marked a stark reacceleration in Chinese sales.
Lululemon Athletica
‘s (ticker: LULU) first-quarter earnings results, for instance, showed that Chinese revenue increase 79% during the period—which helped the company barrel through Wall Street’s expectations and set the stock up for its biggest percentage increase since 2019.
Lululemon
isn’t alone in recording better performance in China.
Ralph Lauren
(RL),
Tapestry
(TPR),
Under Armour
(UAA),
VF Corp.
(VFC),
Skechers
(SKX),
Canada Goose
(GOOS), and
Capri Holdings
(CPRI) all saw Chinese sales jump in the quarter.
“China, with the reopening, we see a lot of strength there, and quite frankly, are doing a little bit better than we had even anticipated, which is a good sign,” said Capri CEO John Idol in a call with investors.
Restaurants were also reaping the benefits of more active consumers, with
Starbucks
(SBUX),
Yum China
(YUMC), and
McDonald’s
(MCD) reporting positive same-store sales in their latest quarters. There could be even more upside if the government passes a stimulus package to prop up China’s ailing property market.
Still, that doesn’t mean retailers are in the clear.
“China’s reopening is boosting spending outside the home, which will help domestic companies and global companies with exposure to this market,” wrote a group of analysts at Moody’s Investors Service. “However, the rebound may not be as strong or lasting as some predict.”
Some Chinese consumer-facing companies are already feeling the pinch. While American retailers saw sales jump in the first quarter of the year, Chinese e-commerce companies saw more muted results.
Alibaba’s
(BABA) revenue declined 2.6% in the latest quarter and
JD.com
(JD) sales fell 1.4%. These companies’ shares have also struggled: JD stock is down nearly 40% this year, while
Alibaba
stock is off 4%. E-commerce company
Pinduoduo,
now known as PDD Holdings (PDD), is down 15%.
The past few weeks have been a volatile one for Chinese stocks. Hong Kong’s
Hang Seng Index
(HSI) briefly slipped into bear market territory in May, following a series of worse-than-expected economic indicators that reaffirmed fears that the current recovery could peter out. China’s manufacturing purchasing managers index—a key indicator for factory output—contracted for the second straight month, and the country is also facing a new Covid-19 variant that threatens to derail the reopening.
“Clearly, the tailwind of the post-pandemic China reopening is sputtering,” wrote Navellier chief investment officer Louis Navellier in an email.
Investors will get a fresh batch of economic data next week that will help markets determine how at-risk the recovery is. On Wednesday, China reports import and export figures for May. Trade has long been a crucial component of China’s economic growth, which in turn has helped fueled global trade. Economists are expecting Chinese exports to have grown by 2% in May from a year earlier, according to data aggregator FactSet—which would be a marked deceleration from April’s 8.5% increase.
With trade and manufacturing cooling down, China’s consumers are keeping the tenuous recovery afloat. Here’s to hoping they’re strong swimmers.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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