Broker's View

Rising price of gold leaves hefty dent in jeweller Luk Fook’s sales

Retailer with 1,400 outlets in Asia and North America, saw same store sales decline 37 per cent in the three months to September

PUBLISHED : Monday, 24 October, 2016, 3:32pm
UPDATED : Monday, 24 October, 2016, 10:54pm

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 and Macau, 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 US$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.

“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.

She estimated this year’s net income to slip from HK$959 million last year to HK$951 million before bouncing up to HK$1.07 billion next year, still down on 2015’s HK$1.62 billion.

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.

“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 closed at HK$21.45 on Monday, its highest price since August last year, while Chow Tai Fook closed at HK$5.66, its highest in almost a month.