NEW YORK (TheStreet) -- China's once red-hot stock market and surging economy are burning up, and several major U.S. retailers that operate in the country may be surprised by how quickly that derails their strong sales trends.
Chinese shares plunged more than 8% on Monday and fell another 1.7% on Tuesday, sparking fresh fears on the country's economic health. Monday's drop represented the largest single-day fall for Chinese stocks since Feb. 27, 2007.
The reinvigorated selling pressure followed three weeks of calm in China's stock market, as government officials took multiple steps -- such as making it easier for retail investors to buy stocks-- to shore up investor confidence. Chinese equities zoomed 150% during the twelve months up to June 12, then went onto crash by about 32% before bottoming out on July 8.
The nosedive in Chinese stocks could signal a deeper slowdown in the economy after years of supercharged growth. And the evaporation of wealth from the stock market's precipitous decline could itself be bad news for several major U.S.-based retailers doing business in the country right now and experiencing strong sales there in recent quarters.
Starbucks' same-store sales in China surged 11% on higher store-traffic counts in the most recent quarter. The coffee king's sales in China were primarily fueled by ready-to-drink products, such as bottled frappucino, that are being sold in a growing number of Chinese stores. But Starbucks founder and CEO Howard Schultz pointed to several other factors influencing the brand's performance in the country.
About 40% of the transactions for Starbucks China are being done via the digital Starbucks card, suggesting the card is being given as a gift. Another is the apparent allure of sitting in a fancy new Starbucks store in China. Giving the gift of a Starbucks card, or visiting a location during a lunch break, could fall under pressure should the Chinese opt to rein in their spending.
Starbucks now has 1,700 stores across 90 cities in mainland China, and has a goal of hitting 10,000 locations there within the next five years.
TheStreet takes a look at three U.S. retailers that could be hit with surprising sales weakness from China as the year progresses.
Sales from China as a % of total annual sales: About 14%
China is now the world's third-largest buyer of luxury consumer goods, accounting for 12% of global demand, according to investment bank Goldman Sachs. The investment bank forecasts that Chinese purchases of high-end items-including designer handbags, perfumes, and watches-will grow by 25% annually over the next four years. By the end of this year, Goldman Sachs believes China will be the world's largest luxury brand consumer, with a 29% global share.
Coach, which pitches itself as an affordable luxury to Chinese consumers, may see its otherwise solid sales trend in the country derailed in future quarters as the Chinese reduce luxury purchases amid shrinking net worth. Coach operates 169 retail stores and shop in shops in China, and is scheduled to open five new stores there from July 31 to December 2015.
There are already signs emerging that the slowing Chinese economy and volatile stock market are starting to take a toll on the luxury goods maker's sales. China sales rose 10% from the prior year in constant currency, and 8% in dollar terms, in the most recent quarter. That marked a slowdown from 13% sales growth in constant currency, and 12% in dollar terms, in the preceding quarter.
Execs at Coach slightly lowered their sales forecast for China to $590 million to $600 million, from $600 million, for the fiscal year ended June 30. "We expect that there will likely be continued volatility in the near term due to both macroeconomic issues and geopolitical events which are impacting trends in China and some key tourist markets," cautioned Coach CEO Victor Luis on an April 28 call with analysts.
Sales from China as a % of total annual sales: About 10%
Nike has spent the past year in China reducing inventory levels of slow-selling products and improving how its merchandise is presented to the Chinese in retail stores and mall shops. The efforts have paid dividends.
Excluding the impact of currency, Nike's sales in Greater China rose 19% in its fiscal year ended May 31. Footwear sales there surged 27%, apparel sales gained 7% and equipment sales were unchanged. For now, Nike's sales momentum in China is poised to continue.
Nike reported on June 25 that its future orders in Greater China spiked 22% on a currency-adjusted basis. That represented the best growth rate in future orders amongst all of the countries where the sneaker's giant operates. Future orders cover projected deliveries from June 2015 through November 2015.
But amid the slowdown in China's economy and reeling stock market, Nike could experience order cancelations for its pricey wares as department stores adjust to more cautious spending patterns by consumers. In turn, that would disappoint Nike's investors expecting strong growth based on the robust future orders shared in June.
Retail sales more broadly have already started to slow in China. According to the National Bureau of Statistics, China's retail sales grew 10.4% year over year in the first half of 2015. The growth was down 0.2 percentage points from the rate seen in the first quarter.
Sales from China as a % of total annual sales: About 17%
Apple has had no trouble selling expensive iPhones in China this year. Sales in Greater China surged 112% in Apple's most recent quarter, fueled by demand for the latest iPhones. Apple currently has 22 stores in China, and is on track to have 40 open by the middle of 2016.
Apple CEO Tim Cook at least acknowledged on a call with analysts that China's plunging stock market is a mild concern. "It's true that the equity markets have recently been volatile," said Cook on a July 21, adding "this could create some speed bumps in the near term."
But in typical Apple fashion, Cook sought to quickly downplay any notion that Apple's sales this year would be upended in China due to a volatile stock market. Cook pointed to three reasons why.
First, despite the volatility in the Chinese market, Cook believes the market's surge in the past 12 months is still supportive of strong spending by the Chinese on pricey iPhones. Second, the Apple chief thinks stock market participation among Chinese households is fairly narrow. Finally, the rise of the middle class in China, according to Cook, "is transforming China." Cook cited a recent McKinsey study projecting the upper middle class, aka likely iPhone buyers, growing from 14% of households in 2012 to 54% of households by 2022.