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HONG KONG — Chow Tai Fook, China’s largest jeweler by market share, reported a 13.2 percent drop in net profit for the fiscal year endedMarch 31 due to sluggish consumer spending.
Net profit for the year declined to 5.51 billion Hong Kong dollars, or $710 million. Same store sales in mainland China declined by 3 percent while same store sales for Hong Kong and Macau fell by 3.7 percent. Revenue for the year rose 1.5 percent to 57.4 billion Hong Kong dollars, or $7.39 billion, despite slowing same store sales due to growth in the number of points of sales.
Speaking to members of the Hong Kong press from Beijing via video conference, Chairman Henry Cheng acknowledged that with 70 percent of the company’s sales coming from mainland China, Chow Tai Fook is of course affected by government policies regarding luxury spending. But “it’s beyond our control,” he said.
That said, Cheng and other company executives maintained a positive outlook, despite the short-term volatility, saying that they expect same store sales growth in China, Hong Kong and Macau to recover in the coming year. Cheng also said he remains confident that the company will see doubledigit growth in sales this year and that sales could double within three years, though it would depend on which three year period.
Jewelers have reported slowing sales due in large part to a crackdown by the Chinese government on conspicuous consumption by government officials. Gift giving, an important part of doing business in China, has been a significant driver of sales for jewelers. At the same time, slowing economic growth in China has pushed consumers there to be more conservative.
Selling and distribution costs as well as administrative expenses increased by 14.2 percent during the year to 9.18 billion Hong Kong dollars, or $1.18 billion, while advertising and promotional expenses jumped by 77.8 percent to 797.2 million Hong Kong dollars, or $102.7 million. Management said advertising and promotional activities were strategically increased inhopes that efforts will increase market share once the market recovers. Executives pointed out that sales of gold products aren’t necessarily hurting sales of other products; platinum jewelry sales, for instance, increased. Executivesalso said that the company is focusing on personal spending and gift-giving — such as weddings, birth of a child or other personal events — which are less affected by Chinese government policy.
Looking at other cost increases, the company said rental costs rose during the year, mainly due to the opening of new locations in prime areas as well as rent renewals in Hong Kong and Macau. Executives said costs should decline in the future and emphasized that in mainland China, rental costs and human resources costs are contained because they are tied to sales.
Chow Tai Fook executives said they are maintaining their expansion plans in China, targeting 200 new locations next year and 2,000 points of sale by the end of fiscal year 2014. Chow Tai Fook added 209 points of sales in the 12 months ending in March for a total of 1,836 locations. Some 85 percent of Chow Tai Fook’s points of sale are now located in tier two or lower tiered cities in China; the company intends to continue opening new sales locations in these lower tiered cities.
Shares of Chow Tai Fook closed down 1.7 percent on Tuesday ahead of the company’s earnings announcement. Shares are down more than 30 percent since the beginning of the year.