Coronavirus Quarantines Push Deadlines, Sink Sales

The financial impact of the coronavirus epidemic in China is beginning to be assessed by footwear and apparel companies. An estimated 25 percent of American Chamber of Commerce members in Shanghai are forecasting a revenue drop of more than 15 percent this year.

Footwear companies who source in China face the possibility of supply chain interruptions. Tens of millions of Chinese workers were ordered to stay home on an extended Lunar New Year break to reduce the risk of human-to-human transmission of the virus. Some are expected to return to factory jobs starting this week, but it’s unclear how many and to what facilities. On Monday, Reuters reported that at least four Cambodian textile factories may be forced to suspend operations due to delays in receiving raw materials from China.

According to the Footwear Distributors and Retailers of America trade group, the situation has affected manufacturing broadly across manufacturing hubs in China and beyond. The report said that the city of Quanzhou in the Fujian province — the second-largest center of footwear sourcing in China for the U.S. — the government has told people to shelter in place until Feb 18, which will further push out production timelines. Additionally, both Hong Kong  and China have implemented quarantines of nationals entering from China, and some materials slated to enter Vietnam for factory production are being held up by customs over virus fears. (The coronavirus is spread person-to-person, and there’s no evidence that suggests it can be spread via goods or materials.)

“Given the current coronavirus epidemic and unprecedented lock-down and quarantine of some 60 million or more Chinese citizens … the Chinese government especially wants to project a sense of calm, order and strength at this time,” says Nelson Dong, a senior partner for international law firm Dorsey & Whitney and co-head of its Asia group, in a statement. “It therefore wants to show its citizens and the world that, in spite of that admittedly grave national health emergency, it can still carry on ‘business as usual’ and is not flustered or distracted.”

The virus has also cratered retail sales in China.

VF Corp., parent of Vans and The North Face, disclosed Friday that 60 percent of its owned and partner stores in have been temporarily closed due to mitigation efforts tied to the coronavirus, and stores that remain open have “experienced significant declines in retail traffic.”

VFC generated 6 percent of its FY19 revenues, or an implied $830.9 million, on mainland China during the 12 months ended March 30, 2019 with approximately 16 percent ($1.09 billion) of its cost of goods sold sourced directly from mainland China.  

Canada Goose had a “standout performance” in Asia during its third quarter with market revenues doubling to $94.7 million, but the outerwear company has cautioned investors that current heightened uncertainty related to the coronavirus would have a material negative impact on its current fiscal quarter ending March 29.

Columbia Sportswear, which realized a mid-single digit decline in fourth quarter sales in China, and which has a new leadership team in the country working to overhaul and escalate its business there, says it’s “too early to forecast the regional and global financial impact on our business, including sourcing, production and supply chain implications.”

Approximately half of Columbia’s own and wholesale partner stores in China were closed as of late last week. The country is a “low double-digit percentage” supplier of Columbia-branded footwear and apparel and accounts for a majority of the raw materials used in both products.

Columbia is projecting a low-single digit percent increase in its China net sales in 2020, but that outlook does not include any potential financial impact related to the coronavirus.

At Skechers, senior executives expressed a mixed outlook on the brand’s China business in early 2020 while confirming the market’s sales will likely be down in the first quarter. The company, in the midst of completing a China distribution center, says positive business trends in China turned negative once travel restrictions were enacted in late January. Subsequently, there have been depressed retail traffic and comp store trends in China at owned and partner stores, although ecommerce sales have held up.

“February is very difficult, partly because of the travel restrictions, partly because of the unknowns of how consumer discretionary spend patterns are going to be revitalized and when,” Skechers CEO David Weinberg told analysts.