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

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Factories in China hit by Covid shutdowns can return to work conditionally, housing workers on site. Pictured is an auto parts maker in Suzhou that has had 478 employees on site since April 16.

CFOTO | Edition of the future | Getty Images

BEIJING — Several international companies warned last week that the drag of China’s Covid checks would affect their entire businesses.

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

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

International businesses face a host of other challenges, ranging from high inflation in the United States for decades and a strong dollar to the Russian-Ukrainian war. But China is an important manufacturing base, if not a consumer market, that many companies have focused on for future growth.

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

Starbucks: suspension of advice

Conditions in China are such that we are virtually unable to predict our performance in China in the second half of the year.

Howard Schultz

Starbucks, interim CEO

The coffee giant suspended its guidance for the remainder 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 second half of the year,” interim CEO Howard Schultz said on an earnings call, noting a additional uncertainty related to inflation and company investment plans.

Starbucks said it still expects its China business to be larger than the United States in the long term.

Apple: Shanghai lockdown will hit sales

“Covid is hard to predict,” CEO Tim Cook said after outlining those estimated costs, according to a transcript of the StreetAccount earnings call.

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

DuPont: Impact of containment in the second quarter

DuPont, which sells multi-industry specialty products such as adhesives and building materials, on Tuesday announced second-quarter guidance that fell short of analysts’ expectations.

“We expect the key external uncertainties in the macro environment, namely the COVID-related shutdowns in China, to further tighten supply chains, leading to slower volume growth and sequential margin contraction in the second quarter of 2022,” said Lori Koch, chief financial officer of DuPont. in a statement, noting that “underlying demand continues to remain strong.”

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 in the electronics sector, the inability to obtain raw materials from China forced some factories to operate at lower rates, affecting the margin in the second quarter.

The company is forecasting 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 are also lower than the 84 cents per share estimated by FactSet.

Forecasts for the full year ending in December remained in line with FactSet’s expectations.

Estee Lauder: lower outlook for the financial year

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

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

Learn more about China from CNBC Pro

“As a result, retail traffic, travel and distribution capacities have been temporarily reduced,” he added. “The company’s distribution facilities in Shanghai have been operating with limited capacity to fulfill physical and online orders from mid-March 2022.”

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

Yum China: Quarterly loss ahead

While analysts generally expect earnings of 29 cents per share in the second quarter, Yum China Chief Financial Officer 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 the KFC and Pizza Hut fast food brands in China, and is the majority shareholder in a joint venture with the Italian coffee company Lavazzawhich opened cafes in China last year.

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

Chinese companies cut profit forecasts

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

The quarterly results are the worst since the first quarter of 2020, analysts say.

This is when the pandemic initially shocked the economy and GDP contracted.

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

Overall decline in business morale

While corporate America also faces a number of domestic challenges, Bank of America’s proprietary measure of business sentiment for S&P 500 stocks fell sharply in the first quarter to its lowest level since the second quarter of 2020, the company said in a report Sunday.

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

Many great corporate benefits are yet to come, including Results from Disney and Toyota Motors will be released next Wednesday local time.

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

—CNBC Robert Hum contributed to this report.

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