Rising price of gold leaves hefty dent in jeweller Luk Fook’s sales
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Surging gold prices, and a mini gold rush in 2015 have been blamed by leading Hong Kong jewellery retailer Luk Fook Holdings for a sharp fall in sales during its second quarter.
The retailer which operates over 1,400 retail outlets in mainland China, Hong Kong, Macau, Singapore and North America, saw same store sales decline 37 per cent in the three months to September (its second quarter) on the same period last year, which was weaker than expected, Bank of America Merrill Lynch analyst Tina Long said in a note.
Much of the decline was due to gold sales, which recorded a 47 per cent fall in same store sales in the second quarter year on year , worse than competitor Chow Tai Fook’s 36 per cent decline.
Sales of gemsets, items designed using various types of gem stones, fell 14 per cent, better than the 23 per cent drop seen by peers, but started moving into single digit growth in September and October.
Sales were better in the mainland than in Hong Kong, which still accounts for 75 per cent of its revenue. Mainland sales fell 23 per cent, while combined sales for Hong Kong and Macau fell 37 per cent in the second quarter.
Luk Fook’s management said in a statement the deterioration in gold sales this year was being compared with what had been a high base in 2015, thanks to the mini gold rush in July and August.
That had been coupled with “overall sluggish retail sentiment” and the gold price rally in the same period this year.
Daiwa analyst Jamie Soo noted that Hong-Kong based competitor Chow Tai Fook had released sales performance figures for the same period which showed a “similarly lacklustre performance”.
Gold prices rallied to a three-year high in July as investors chose “safe haven” assets following Britain’s vote in June to leave the European Union.
Gold futures were trading at over US$1,370 per ounce in July and August, but have dropped back down to $1,267.
Both Long and Soo expect things to get brighter for the jewellery retailer, with Soo noting September had seen low single digit growth, mainly driven by an improvement in sales of gemsets.
“Sales were better in the mainland than in Hong Kong, which still accounts for 75 per cent of its revenue.”
“Management also indicated that there has been slight improvement in gemset sales in Hong Kong and Macau,” he said.
This momentum had continued into China’s national “golden week” holiday in October, and the management has said they believe there were signs of stabilisation, Soo said.
Long expected a more favourable movement in the gold price and a better-than-expected recovery in consumer sentiment to help push the price objective up.
“We think that sales bottomed in July, and kept improving thereafter with positive growth for gemsets seen in both September and October in Hong Kong and mainland,” Long said.
Long estimated this year’s net income to slip from HK$959 million last year to HK$951 million before bouncing up to HK$1,072 million next year, still down on 2015’s HK$1,615 million.
Long expected the share price to trend upward, helped by lower rental costs for retail outlets, although she lowered her price objective for Luk Fook from HK$21.70 to HK$21.00.
“Luk Fook would be the biggest beneficiary from the recent upward trend of gold price due to its smallest hedging ratio of 15 per cent to 20 per cent,” she said.
“We see re-rating more likely as sentiment towards gold stocks improves.”
But Long warned that there were a number of risks to the rating, including a slowdown in Hong Kong tourist growth and depreciation of the yuan and gold prices.
Retail sales in Hong Kong plunged 10.5 per cent in August on dwindling visitor numbers – the steepest decline since February, and the 18th consecutive monthly contraction.
Luk Fook Holdings was trading at HK$20.25 on Monday, while Chow Tai Fook was trading at HK$5.63.
Questions & Answers
Q.Why did Luk Fook's second-quarter sales decline so significantly?
Why did Luk Fook's second-quarter sales decline so significantly?
The primary reason was a 47 per cent fall in same-store gold sales compared to a high base in 2015, coupled with a general sluggish retail sentiment. Rising gold prices also deterred buyers during the period.
Q.Which product category performed better for Luk Fook compared to its competitors?
Which product category performed better for Luk Fook compared to its competitors?
Sales of gemsets declined by 14 per cent for Luk Fook. This was a better performance than the 23 per cent drop seen by competitor jewellers for the same product category.
Q.What factors are expected to improve Luk Fook's financial performance in the near future?
What factors are expected to improve Luk Fook's financial performance in the near future?
Analysts anticipate a more favourable gold price movement and improved consumer sentiment. Lower rental costs for retail outlets and a better performance in gemset sales are also expected to contribute to a recovery.
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