Retail luxury investors are missing the biggest red alert sounded off by Burberry yesterday.
I may be starting to sound like a broken record, but it sounds like that record is starting to crack. Yes we know Mainland China is slowing. We have heard that from countless retailers (Nike, Tiffany, Coach, LVMH, Chow Tai Fook, Burberry). But my concern has been what happens WHEN (not if) Europe's Chinese tourism part of the equation begins to slow? If you scoff at that thought, the Burberry pre-announcement tells you why you need to pay attention.
Yesterday, Burberry announced profit for the current quarter will be at the low end of expectations. Same-store sales were flat in the last 10 weeks and sales decelerated in the past two weeks. The slowdown was geographically broad-based. And guess what? Even tourism sales into Europe from China are slowing.
Now that is a red flag for all luxury brands and here is why:
For European luxury players 30-percent-plus of their business comes from ... you got it ... Chinese tourists. Until now, investors and companies have buried their heads in the sand and reiterated the Mainland slowdown will be offset by Chinse tourism in Europe. After all, the Chinese affluent are in search of luxury goods at cheaper prices — 30 percent less in Europe vs. China.
If the Mainland is slowing, however, and we have no doubt that is happening, does it not make sense that a slowdown in tourism might be close behind? It has actually been quite shocking to see how many investors and analysts continue to defend luxury players, saying Chinese tourism will offset the slowdown in Mainland China. It looks like now Burberry is telling us that theory is flawed.
Burberry has suggested Chinese tourists are steering away from pricier goods, even as the company has made an effort to shy away from entry-level price points. Can we call this a "company specific issue"? No. With traffic down globally, this has to be a warning sign for other luxury goods makers.
Critics will say a China slowdown is already priced into valuation of luxury stocks. I disagree. What happens to those high-cost flaghsip stores in Europe if Chinese tourists are not lifting all tides? Where there is smoke there is fire.
—Guest Blog by Stacey Widlitz
Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for five years. Follow Stacey on Twitter @StaceyRetail.