Wall Street’s worried China’s draconian Covid-19 restrictions — which have weighed heavily on the world’s second largest economy for nearly three years — could drag down earnings at Estee Lauder (EL) and Starbucks (SBUX) when the two U.S. companies report this week. At the Club, we’ve also tempered our expectations given the heavy exposure of both holdings to China, but believe the headwinds are temporary and that the Chinese economy will gradually reopen in the quarters ahead. Estee Lauder reports its 2023 fiscal first-quarter and full-year results Wednesday before the opening bell. Analysts expect earnings-per-share to plummet by 30% year-on-year, to $1.31 a share, while total revenue should fall by 10.5%, to $3.93 billion, according to estimates compiled by Refinitiv. Starbucks reports fiscal fourth-quarter and full-year results after the closing bell on Thursday. Analysts expect earnings-per-share to slide by 28% year-on-year, to 72 cents a share, according to Refinitiv. Total revenue is expected to climb by 2.5% compared with the year prior, to $8.31 billion. Wall Street’s take Multinationals operating in China have largely seen sales come under pressure due to continued Covid lockdowns, part of Beijing’s so-called zero-Covid policy. Cosmetics giant Estee Lauder, which relies on China for about 36% of its revenue, should see weakness in the region in its fiscal first before ultimately posting positive growth in 2023, according to analysts at the Telsey Advisory Group. “While the degree of underperformance varies, China generally continues to be the weakest region among the companies that have reported results for the quarter ending September, given lockdowns, supply chain disruptions, and depressed store traffic,” the analysts wrote in a recent research note. At the same time, analysts at Credit Suisse wrote in a note, “While we still think EL has the clearest China profit growth story in our coverage over the next decade…recent [government] comments suggest the Covid zero policy is likely to remain an overhang for consumer brands in the near term.” Coffee chain Starbucks, which relies on China for roughly 13% of sales, is another U.S. retailer facing “mounting China concerns,” according to Baird. Analysts at the bank wrote in a recent note that they expected economic restrictions in China to dampen Starbucks’ outlook when it reports this week. “Ongoing COVID-19 lockdowns in China could lead to weaker-than-modeled International segment [comparables] and reduce confidence in the recovery scenario that appears needed for SBUX to deliver its three-year growth targets,” the analysts wrote in a recent note. Still, analysts at Credit Suisse argued the China “should reverse to a tailwind over time” for Starbucks, calling the market one of the “most meaningful drivers of upside to numbers.” The Club take We hope that China takes steps to ease Covid restrictions, which would re-stimulate business activity and, ultimately, support future…
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