China has recently announced it will begin to ease COVID-19 restrictions. Shanghai, the largest city in China, has been under extensive lockdowns for over two months now. It is also one of China's key economic and trade hubs. As businesses and factories reopen and residents move freely around the city again, international investors are also breathing a collective sigh of relief.
The lockdowns have figured heavily into investor concerns and have been a frequent topic of discussion on earnings calls. Their expected effect on economic demand have caused the stocks of many companies with exposure to China to fall sharply.
Now that the situation is beginning to normalize, what stocks could be key beneficiaries of the reopening?
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Tapestry
Tapestry (TPR 0.30%), the parent company of affordable luxury brands Coach, Kate Spade, and Stuart Weitzman, has been hit hard by the lockdowns. Its most popular brand, Coach, has a large physical presence in China and is popular in the world's most populous country. Shares of Tapestry have started to bounce back as of late after the company reported impressive earnings results, but the stock is still down 15% year to date and 26% off of its 52-week high. On its last earnings call, management hit the nail on the head, predicting that the restrictions would start to wind down by June.
On that call, CFO Scott Roe reported that Coach was actually enjoying year-over-year revenue growth in China before the lockdowns began to take hold. Roe says that by the end of March, 40% of the company's locations in China were either closed altogether or operating with reduced hours, and that the company's distribution hub in Shanghai was shuttered.
CEO Joanne Crevoiserat added, "[W]e're navigating the near-term headwinds, but we feel well-positioned as China recovers to continue to drive growth, both during the recovery period and long term in the market." Tapestry sees "meaningful long-term potential" for Coach's growth in China, Crevoiserat said. The company is still guiding for record revenue of $6.7 billion for the fiscal year even when accounting for the situation in China, so a full reopening would be an added bonus.
A study by Bain & Company predicts China will grow to 46% of global luxury sales by 2025, up from 33% in 2019. This would help to transform China from a headwind for Tapestry in the short term into a major, long-term growth driver.
In addition to being a key beneficiary of China's reopening, Tapestry trades at a very modest valuation of 8.4 times next year's earnings, sports a dividend yield of just under 3%, and is returning a lot of capital to shareholders via share buybacks.
Canada Goose
China is the country where high-end jacket and apparel maker Canada Goose (GOOS 1.60%) has established its largest physical presence with 14 physical locations. Its shares have fallen 45% year to date in large part as a reaction to the lockdowns in China. On its last earnings call, CEO Dani Reiss reported that four of the company's stores in China were closed and that the others were seeing reduced traffic as a result of the restrictions. E-commerce in China was also facing challenges and disruptions. The company reported that Asia Pacific is the only region where it saw a decline in sales caused by store closures in mainland China.
But going forward, China can be a tailwind for the company as things normalize. Reiss said demand for the brand is "robust" and does not expect the current situation to have a significant impact on Canada Goose's results during the third quarter, which is traditionally its busiest time of year in China.
Canada Goose is making other strategic moves in China. It recently appointed Belinda Wong, the chairman of Starbucks (SBUX 0.53%) China and an EVP of Starbucks, to its board of directors.
Starbucks
Speaking of Starbucks, the world's largest coffee chain has over 5,400 stores spread out across more than 200 cities in China. Starbucks also has a longstanding history in China, having opened its first location in Beijing in 1999. During the last quarter, same-store sales in China fell 23% as a result of store closures and restrictions, so as conditions ease, these numbers should rebound.
Starbucks has worked with China's Alibaba Group Holding for several years and Alibaba customers can place a Starbucks order on various Alibaba platforms.
In January, Starbucks partnered with Meituan to expand its delivery services and offer customers ordering through Meituan's app the same rewards it offers through its own app. Meituan is China's largest food delivery service with over 660 million users, so this could be a fruitful partnership for Starbucks. Additionally, customers will be able to use Meituan to book events at Starbucks, such as a group coffee tasting.
As the situation in China normalizes, Starbucks should be a key beneficiary thanks to its large presence in the country and the partnerships it has forged there. Starbucks shares are down 33% year to date and 38% off of their 52-week high, and currently yield 2.5%.
Starbucks has been successful with its loyalty program and digital ordering; this program could find further success in China and Asia in general, where mobile payments have experienced widespread adoption.
