Thursday, June 13, 2024
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China sales help Starbucks, Yum, MGM, Disney, Tapestry

Pedestrians walk past Yum! Brands Inc. Pizza Hut and KFC restaurants in Shanghai, China.

Qilai Shen | Bloomberg | Getty Images

China is leaving behind pandemic lockdowns, and U.S. companies like Procter & Gamble, Starbucks and MGM Resorts International say the country’s recovery is boosting their overall sales as consumers in their home markets watch their wallets.

With its large population and swelling middle class, China is a desirable market for many multinational companies that have seen their U.S. businesses mature. But its zero-Covid policy, which imposed harsh restrictions to stop the spread of the virus, hurt the country’s economy — and revenue for the many U.S. companies that sell their goods or services there.

After rolling back the policy in December, China’s economy grew 4.5% in the first quarter. U.S. companies are reporting that demand in China is returning, boosting their sales at a time when many U.S. consumers are pulling back their spending.

However, the recovery hasn’t been as swift or dramatic as many investors hoped. Most companies are still waiting to surpass pre-pandemic sales in China. The travel retail segment is taking even longer to bounce back. And Apple’s sales fell in its China region, which includes the mainland, Hong Kong and the nearby self-governing island of Taiwan.

Morgan Stanley analyst Kelly Kim wrote in a research note that the firm’s China consumer team expects that recovery will come in three stages: a spring break in February through April, summer “revenge spending” in May through July, and a stable recovery starting in August.

Restaurants rebound

U.S.-based restaurants were among the companies that saw demand return in China. But sales haven’t snapped back to 2019 levels just yet.

Starbucks reported that its same-store sales in China rose 3% in its latest quarter, reversing their declines. Some Wall Street analysts were still anticipating shrinking same-store sales for the company’s second-largest market.

A year earlier, the coffee giant suspended its outlook for the year, citing lockdowns in China as one of the reasons for the decision. That quarter, Starbucks’ same-store sales in China sank 23%.

Yum China, Yum Brands’ master franchisee in China, also said its same-store sales grew 8% in the first quarter. China is KFC’s largest market and Pizza Hut’s second largest.

“We benefited from increasing mobility and saw a 40%-plus growth at transportation and tourist levels. However, same-store sales at these locations in the first quarter were still 20% to 30% below 2019 levels,” Yum China CEO Joey Wat told analysts on the company’s conference call.

Travel boosts parks and casinos

Tourists pose for a photo at the Shanghai Disney Resort as the resort kicked off a month of festivities from January 13 to February 10 to celebrate the upcoming Chinese New Year.

China News Service | China News Service | Getty Images

Chinese consumers also appear to be traveling again as restrictions lift, visiting theme parks and casinos. The increase in travel and leisure spending helped a range of U.S. companies at the start of the year.

Disney touted “improved financial results” at its Shanghai and Hong Kong resorts.

“We’ve been really gratified to see the bounce-back from the pandemic closures that we had,” Disney CFO Christine McCarthy told analysts Wednesday on the company’s conference call.

Macao, the world’s biggest gambling hub, has seen a resurgence of tourists after testing requirements for inbound travelers from the mainland, Hong Kong and Taiwan were dropped. Tourism peaked over the Lunar New Year holiday in late January.

MGM Resorts International operates MGM Cotai and MGM Macau venues in the region. Earlier this month, the casino giant reported a swift return to profitability as foot traffic at its Chinese casinos reaches pre-pandemic levels. In the first quarter, its properties in China generated adjusted earnings of $169 million, or 88% of the division’s adjusted earnings four years earlier.

Airbnb said for its latest quarter its Asia-Pacific division saw its biggest year-over-year growth for nights and experiences booked. The company closed its domestic China business in 2022, shutting down all mainland listings to focus on helping Chinese consumers find lodging abroad instead.

“We are encouraged by China’s recent lifting of its travel restrictions even though we anticipate the outbound recovery to be gradual due to challenges with limited flight capacities,” the company wrote in its quarterly letter to shareholders.

While many U.S.-based businesses are benefiting from China’s rebound, companies are still waiting to see the same recovery in travel retail.

SK-II, a luxury skin-care brand owned by Procter & Gamble, has seen its sales bounce back in China, with the notable exception of its travel retail segment. Overall, Procter & Gamble’s organic sales rose 2% in China. As consumer mobility rises, the consumer packaged goods giant expects revenue to rebound even more.

Scott Roe, chief financial officer of Tapestry, the parent of Coach, Kate Spade and Stuart Weitzman, said Thursday that the company has begun to see an uptick in domestic Chinese travel, including in Hong Kong and Macao. Yet, he added that global Chinese tourism is below pre-pandemic levels — and said that the potential for more travel could bring opportunity ahead.

In its greater China unit, Tapestry expects a mid-single-digit gain in revenue for the fiscal year, including an expected increase of about 50% in the next quarter. The company’s sales momentum in China is helping offset weakness in the U.S., as North American consumers become more cautious.

Though many businesses have struggled with travel retail in China, at least one company is already seeing its sales at duty free shops and tourist destinations bounce back.

Beauty giant Coty said it’s seen consumer traffic return to retailers, and pointed to more flights to the tropical island and shopping district Hainan, where it has dozens of stores. The French-American company owns Covergirl, Kylie Jenner’s beauty lines, and a slew of designer perfume and cosmetics brands. Coty’s travel retail sales climbed more than 30% in the quarter.

A glut of inventory weighed on Coty’s China sales in its latest quarter, but April’s sales were still higher than both the year-ago period and two years prior.

Piper Sandler analyst Korinne Wolfmeyer called the company one of her favorite beauty stocks in a note to clients following Coty’s quarterly earnings report. She in part cited its China performance.

“We are remaining cautiously optimistic on China for the beauty market in the near term, but for COTY specifically, we view the company’s strategic investments in the region and key product launches as a driver of market outperformance,” she wrote.

— CNBC’s Melissa Repko and Stefan Sykes contributed reporting for this story.

This story originally appeared on CNBC

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