From Estee Lauder to Apple, China’s Covid restrictions take their toll

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Factories in China affected by Covid lockdowns can conditionally resume work, by housing workers on-site. Pictured here is an auto parts manufacturer in Suzhou that has had 478 employees on site since April 16.

CFOTO | Future Publishing | Getty Images

BEIJING — Several international corporations warned in the last week the drag from China’s Covid controls will hit their entire business.

Since March, mainland China has battled an outbreak of the highly transmissible omicron variant by using swift lockdowns and travel restrictions. The same strategy had helped the country quickly return to growth in 2020 while the rest of the world struggled to contain the virus.

Now the latest lockdown in Shanghai has lasted for more than a month with only slight progress toward resuming full production, while Beijing has temporarily closed some service businesses to control a recent spike in Covid cases.

International corporations have a host of other challenges to deal with, from decades-high inflation in the US and a strong dollar, to the Russia-Ukraine war. But China is an important manufacturing base, if not consumer market, that many companies have focused on for their future growth.

Here is a selection of what some of the companies have told investors about China in the last week:

Starbucks: Suspending guidance

Starbucks said Tuesday same-store sales in China fell by 23% in the quarter ended April 3 from the same quarter last year. That’s far worse than the 0.2% increase analysts expected, according to FactSet.

Conditions in China are such that we have virtually no ability to predict our performance in China in the back half of the year.

Howard Schultz

Starbucks, Interim CEO

The coffee giant suspended its guidance for the rest of the fiscal year, or the remaining two quarters.

“Conditions in China are such that we have virtually no ability to predict our performance in China in the back half of the year,” interim CEO Howard Schultz said on an earnings call, noting additional uncertainty from inflation and the company’s investment plans.

Starbucks said it still expected its China business to be bigger than the US in the long term.

Apple: Shanghai lockdown to hit sales

Despite nearly all its final assembly plants in Shanghai restarting production, Apple said the lockdowns would likely hit sales in the current quarter by $4 billion to $8 billion — “substantially” more than in the last quarter. The other factor is the ongoing chip shortage, management said on an April 28 earnings call.

“Covid is difficult to predict,” CEO Tim Cook said after describing those estimated costs, according to an earnings call transcript from StreetAccount.

Apple also blamed Covid disruptions for affecting consumer demand in China.

DuPont: Second-quarter lockdown impact

DuPont, which sells multi-industry specialty products such as adhesives and construction materials, announced second-quarter guidance Tuesday below analysts’ expectations.

“We anticipate key external uncertainties in the macro environment, namely COVID-related shutdowns in China, will further tighten supply chains resulting in slower volume growth and sequential margin contraction in the second quarter 2022,” Lori Koch, Chief Financial Officer of DuPont, said in a release, noting that “underlying demand continues to remain solid.”

Two DuPont sites in China “went into full lockdown mode in March” and are expected to be fully reopened by mid-May, Koch said. She also said that within the electronics business, inability to get raw materials from China forced some factories to run at lower rates, affecting margin in the second quarter.

The company expects revenue of $3.2 billion to $3.3 billion in the second quarter, slightly below the $3.33 billion forecast by FactSet. Earnings per share of 70 cents to 80 cents in the second quarter is also below FactSet’s estimated 84 cents a share.

Full-year guidance for the year ending in December remained in line with FactSet expectations.

Estee Lauder: Cutting fiscal year outlook

Despite a strong fiscal third quarter, makeup company Estee Lauder cut its full-year outlook due to Covid controls in China and inflation.

“The resurgence of COVID-19 cases in many Chinese provinces led to restrictions late in the fiscal 2022 third quarter to prevent further spread of the virus,” the company said in a release Tuesday.

“Consequently, retail traffic, travel, and distribution capabilities were temporarily curtailed,” it added. “The Company’s distribution facilities in Shanghai operated with limited capacity to fulfill brick-and-mortar and online orders beginning in mid-March 2022.”

The new guidance for the fiscal year, which ends June 30, anticipates revenue growth of between 7% to 9%, well below FactSet expectations for a 14.5% increase. Estee Lauder’s forecast of $7.05 to $7.15 earnings per share is also below the $7.57 a share analysts expected.

Yum China: Upcoming quarterly loss

While analysts generally expect second-quarter profit of 29 cents a share, Yum China CFO Andy Yeung warned that “unless the COVID-19 situation improves significantly in May and June, we expect to incur an operating loss in the second quarter.”

The company operates fast food brands KFC and Pizza Hut in China, and is the majority stakeholder in a joint venture with Italian coffee company Lavazza, which has opened cafes in China in the last year.

Yum China said Tuesday that same-store sales plunged by 20% year-on-year in March, and likely maintained the same pace of decline in April. The company said it still intended to achieve its full-year target of 1,000 to 1,200 net new store openings.

Chinese companies cut earnings forecasts

For the first quarter, roughly half of MSCI mainland China stocks, excluding financials, missed first-quarter earnings expectations, with only about a quarter beating expectations, Morgan Stanley analysts said in a note Tuesday.

The quarterly results were the worst since the first quarter of 2020, the analysts said.

That’s when the pandemic initially shocked the economy and GDP contracted.

Read more about China from CNBC Pro

Downward earnings revisions are likely to continue for another two to four weeks, the Morgan Stanley report said, noting all of the mainland traded stocks known as A shares have all reported first-quarter results as of April 30.

Overall decline in corporate sentiment

As US businesses face a number of domestic challenges as well, Bank of America’s proprietary measure of corporate sentiment for S&P 500 stocks fell sharply in the first quarter to the lowest level since the second quarter of 2020, the firm said in a report Sunday.

The latest sentiment score points to a sharp drop in earnings ahead, although that is not BofA’s base case, the report said.

Several major corporate earnings are still ahead, including Disney and Toyota Motors results due out next Wednesday local time.

Shanghai Disney Resort has been closed since March 21 until further notice, while China’s auto sales slumped in March.

— CNBC’s Robert Hum contributed to this report.

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