Flight attendees wearing surgical masks arrive at Don Mueang Airport in Bangkok, Thailand, 07 February 2020. Thai Public Health officials said that the number of people infected with the novel coronavirus in Thailand remained at 25. Nine had been discharged from hospitals. The virus has killed so far at least 638 people and over 31,000 others were confirmed infected, mostly in China.Thailand's surveillance measures against coronavirus outbreak, Bangkok - 07 Feb 2020

There are still more coronavirus questions than answers. 

How long it will last, how far it will spread and just how bad it will be all remain uncomfortably uncertain. 

But when thinking about the commercial fallout, there is a place to start — six months.

Even though the deadly coronavirus has really only taken off over the past couple of weeks, it is already having a dramatic impact on the global fashion business, which counts China a key market for both sales and production. 

And the industry can expect to be dealing with lower revenues and supply chain headaches for at least a few quarters, and potentially longer if the outbreak that has brought industry in China to a crawl hits other markets hard.

Many of the larger companies have said at least half or more of stores in China are closed and that the ones that are open aren’t seeing much foot traffic. Although most have chosen to not publicly estimate the financial impact — some have ventured a guess in recent days, while others have simply stated that it will be “material.” 

Capri Holdings, parent to Michael Kors, Versace and Jimmy Choo, expects a $100 million hit to sales to its fiscal fourth quarter, which is ongoing.

Competitor Tapestry Inc., which owns Coach, Kate Spade and Stuart Weitzman, is just headed into its fiscal third quarter and went further, noting it could lose $200 million to $250 million in sales during the second half, while earnings take a hit of $97 million to $124 million (35 cents to 45 cents a share).

Joanne Crevoiserat, Tapestry’s chief financial officer, took analysts on a conference call through the math, perhaps the most explicit public accounting of how the coronavirus is weighing on fashion. 

“The situation is still unfolding….it’s very dynamic. We are providing transparency based on what we’re seeing today,” she said on Thursday.

“The assumptions are based on what — today, we see a low to mid-teens percent of our business in Mainland China across all brands, with the predominance in Coach brand, where the outlook is an expectation of a 70 percent to 80 percent decrease in those sales through the rest of the year,” Crevoiserat said.

Even if Coach ends up being hit particularly hard, an 80 percent drop in sales for the five months left in Tapestry’s fiscal year is not so much a slowdown as a collapse and one that suggests strongly that everyone is being hit very hard, especially given that the country is the great consumer hope for fashion and particularly luxury.

China is shut down, at least right now, and the impact of the coronavirus is rippling out. 

Panos Kouvelis, a professor of operations and manufacturing management at the Olin Business School at Washington University in St. Louis, said the coronavirus could have a $300 billion-plus impact on the global supply chain and last up to two years. 

“The coronavirus is an uncharted-territory event. It’s a ‘black swan,’ which is a low-probability event with big consequences. The benchmarks we had in the past aren’t fully applicable because of the increased significance of China in the global economy, combined with our heavy dependence on China both as a market and as a manufacturing hub for goods that are more complex and more sophisticated than they were in 2002. So whatever we know from SARS is not a good predictor of the coronavirus’ likely impact,” Kouvelis said on the school’s web site.

China is still the largest apparel producer and accounted for 29.7 percent of all apparel imports to the U.S. last year, valued at $24.9 billion, according to the Commerce Department. 

Many companies have spent the last few years diversifying away from China, hoping to skirt the big tariff increases of the U.S.-China trade war. But the country is still too big for many to avoid. And companies that reacted to the trade war by shifting production in China so goods made there are destined for Europe or another market besides the U.S., still run into coronavirus trouble.

VF Corp., owner of Vans, The North Face and Timberland, said 12 percent of its sales come from the Asia Pacific region (6 percent from Mainland China), but that 16 percent of its total cost of goods sold comes from China (7 percent, or nearly half of that, is destined for the U.S. market).

The supply chain can be disrupted in any number of ways. What good is a factory if it can’t get raw materials? And what good is finished product if the ports are closed? And so on. 

And even if fashion production is relatively untouched, other sectors and their supply chains could get tangled up enough to derail the global economic expansion.

The coronavirus outbreak could also break out wider, creating an even more complex global picture. Already, the situation in parts of China is getting more desperate with quarantine sites being set up, flights canceled and factories closed.

It will take a long time for life to return to normal, but fashion leaders expect consumers to come back, eventually.

“While we cannot currently predict how long this situation will last, we remain confident in our strategy. In the meantime, we are taking mitigating actions and every precaution to help ensure the safety and well-being of our employees,” said Marco Gobbetti, chief executive officer of Burberry Group. Twenty-four of Burberry’s 64 stores in Mainland China are closed. 

Canada Goose Holdings cut its annual revenue outlook to as low as 13.8 percent growth instead of “at least 20 percent” given about two months of severe coronavirus impact. But chief executive officer Dani Reiss said the business would be back. “This sudden change in consumer behavior is temporary and unrelated to underlying demand for our brand,” he said. “We believe that we’re poised to resume our strong growth trajectory in Greater China when this is over.”

That bounce back seems to be at least six months away.

WWD List: China Exposure

The coronavirus outbreak has transformed a large China business into a sudden source of concern.

Portion of Total Revenues Region
Prada SpA 22% China
Adidas AG 21% China
Nike Inc. 17% China
Tapestry Inc. Low to midteens % China
Guess Inc. * 12% China
Brunello Cucinelli SpA 10% China
PVH Corp. 10% China
Lululemon Athletica Inc. * 5% China
Ralph Lauren Corp. <4% China
Levi Strauss & Co. 3% China
Hermès International SA 52% Asia/Pacific (excluding Japan)
Burberry Group plc 39% Asia/Pacific
Salvatore Ferragamo Italia 39% Asia/Pacific
Compagnie Financière Richemont 37% Asia/Pacific
L’Oréal SA 32% Asia/Pacific
Kering SA 32% Asia/Pacific (excluding Japan)
LVMH Moët Hennessy Louis Vuitton 30% Asia (excluding Japan)
Tiffany & Co. 30% Asia/Pacific
Puma AG 28% Asia/Pacific
The Estée Lauder Cos. Inc. 28% Asia/Pacific
Canada Goose Holdings Inc. 18% Asia
Capri Holdings Ltd. 17% Asia
Under Armour Inc. 12% Asia/Pacific
VF Corp. 12% Asia/Pacific
Source: Company reports, statements (* indicates an estimate from Cowen equity research).

 

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