Pictured here is a McDonald’s store in Yichang, Hubei province, China, on July 30, 2024.
Nurphoto | Nurphoto | Getty Images
BEIJING — A theme emerging in the latest slew of U.S. companies’ earnings reports is a drag from the China market.
The Chinese economy — home to more than four times the population of the U.S. — has attracted multinational corporations for decades given its large, fast-growing market. But slower growth and intense local competition, amid tensions with the U.S., are now weighing on corporate earnings.
“Consumer sentiment in China is quite weak,” McDonald’s chairman, CEO and director Christopher Kempczinski, said of the quarter ended June 30.
“You’re seeing both in our industry and across a broad range of consumer industries, the consumer being very, very much deals seeking,” he added. “In fact, we’re seeing a lot of switching behavior in terms of just consumers, whatever is the best deal, that’s where they end up going.”
McDonald’s said sales for its international developmental licensed markets segment declined 1.3% from a year ago. The unit includes China, for which the company indicated sales declined but did not specify by how much.
Chinese companies have also struggled. Nationwide retail sales grew by just 2% in June from a year ago.
In the mainland China stock market, known as A shares, earnings likely hit a bottom in the first quarter and may “pick up mildly” in the second half of the year, Lei Meng, China equity strategist at UBS Securities, said in a July 23 note.
Several U.S. consumer giants echoed the downward trend in their latest earnings reports.
Apple said Greater China sales fell by 6.5% year-on-year in the quarter ended June 29. Johnson and Johnson said China is a “very volatile market” and a major business segment that’s performed below expectations.
After a “strong start” to the year, General Mills CFO Kofi Bruce said the quarter ending May 26 “saw a real souring or downturn in consumer sentiment,” hitting Haagen-Dazs store traffic and the company’s “premium dumpling business.” General Mills owns the Wanchai Ferry dumpling brand.
We don’t expect the return to the growth rates that we saw pre-Covid.
The regional results are also affecting longer-term corporate outlooks.
In China, “we don’t expect the return to the [double-digit] growth rates that we saw pre-Covid,” Procter and Gamble CFO Andre Schulten said on an earnings call last week. He expected that over time, China would improve to mid-single-digit growth, similar to that in developed markets.
Procter and Gamble said China sales for the quarter ending late June fell by 9%. Despite declining births in China, Schulten said the company was able to grow baby care product sales by 6% and increase market share thanks to a localization strategy.
Hotel operator Marriott International cut its revenue per available room (RevPAR) outlook for the year to 3% to 4% growth, due largely to expectations that Greater China will remain weak, as well as softer performance in the U.S. and Canada.
Marriott’s RevPAR Greater China fell by about 4% in the quarter ended June 30, partly affected by Chinese people choosing to travel abroad on top of a weaker-than-expected domestic recovery.
However, the company noted it signed a record number of projects in the first half of the year in China.
McDonald’s also affirmed its goal to open 1,000 new stores in China a year.
Domino’s said its China operator, DPC Dash, aims to have 1,000 stores in the country by the end of the year. Last week, DPC Dash said it had just over 900 stores as of the end of June, and that it expects first-half revenue growth of at least 45% to 2 billion yuan ($280 million).
Local competition
Coca-Cola noted “subdued” consumer confidence in China, where volumes fell in contrast to growth in Southeast Asia, Japan and South Korea. Asia Pacific net operating revenue fell by 4% year-on-year to $1.51 billion in the quarter ended June 28.
“There’s a general macro softness as the overall economy works through some of the structural issues around real estate, pricing, etc.,” Coca-Cola Chairman and CEO James Quincey said on an earnings call.
But he attributed the drop in China volumes “entirely” to the company’s shift from unprofitable water products in the country toward sparkling water, juice and teas. “I think the sparkling volume was slightly positive in China,” Quincey said.
Having to adapt to a new mix of products and promotions was a common occurrence in U.S. companies’ earnings calls.
“We’ve continued to face a more cautious consumer spending and intensified competition in the past year,” Starbucks CEO Laxman Narasimhan said on an earnings call. “Unprecedented store expansion and a mass segment price war at the expense of comp and profitability have also caused significant disruption to the operating environment.”
Chinese rival Luckin Coffee, whose drinks can cost half the price of one at Starbucks, reported a 20.9% drop in same-store sales for the quarter ended June 30.
But the company claimed sales for those stores surged by nearly 40% to the equivalent of $863.7 million. Luckin has more than 13,000 self-operated stores, primarily in China.
Starbucks said its 7,306 stores in China saw revenue drop by 11% to $733.8 million during the same quarter.
Both companies face many competitors in China, from Cotti Coffee on the lower end to Peet’s on the higher end. The only public disclosures regarding Peet’s China business described it as “strong double-digit organic sales growth” in the first half of the year.
Bright spots
Not all major consumer brands have reported such difficulties.
Canada Goose reported Greater China sales grew by 12.3% to 21.9 million Canadian dollars ($15.8 million) in the quarter ended June 30.
Nike reported 7% year-on-year growth in Greater China revenue — nearly 15% of its business — for the quarter ended May 31.
“While our outlook for the near term has softened, we remain confident in Nike’s competitive position in China in the long term,” said Matthew Friend, CFO and executive vice president of the company.
Adidas reported 9% growth in Greater China revenue for the quarter ended June 30. The region accounts for about 14% of the company’s total net revenue.
CEO Bjorn Gulden said on an earnings call that Adidas was taking market share in China every month, but local brands posed fierce competition. “Many of them are manufacturers that go then straight to retail with their own stores,” he said. “So the speed they have and the price value they have for that consumer was different than it was earlier. And we are trying to adjust to that.”
Skechers reported 3.4% year-on-year growth in China in the three months ended June 30.
“We continue to think China is on the road to recovery,” Skechers CFO John Vandemore said on an earnings call. “We expect a better second half of the year than what we’ve seen thus far, but we are watching things carefully.”
— CNBC’s Robert Hum and Sonia Heng contributed to this report.
Check out the companies making headlines in after-hours trading: Netflix — The streaming stock popped more than 4% after third-quarter earnings topped expectations. Netflix earned $5.40 per share on $9.83 billion in revenue, while analysts forecast $5.12 a share and $9.77 billion in revenue. The company also said its ad-tier memberships jumped 35% quarter over quarter. Intuitive Surgical — Shares jumped about 5% after the maker of the da Vinci surgical robot posted better-than-expected third-quarter results. Intuitive Surgical earned $1.84 per share on $2.04 billion in revenue. Analysts surveyed by LSEG had estimated earnings of $1.63 per share on $2 billion in revenue. WD-40 — The maintenance product maker’s shares dropped more than 4% after a disappointing fiscal fourth-quarter earnings report. The company earned $1.23 per share, and said it expects fiscal 2025 profits of between $5.20 and $5.45 per share. OceanFirst Financial — Shares advanced 2.8% after OceanFirst announced that it earned 39 cents per share in the third quarter, a penny above the consensus estimates from FactSet. On the other hand, net interest income and net interest margin both came in lower than forecast. MGP Ingredients — The spirits and food ingredient maker’s stock tumbled nearly 20% after the company warned of disappointing third-quarter results and lowered its full year guidance. CEO David Bratcher said its performance was hurt by weak alcohol trends and elevated whiskey inventories. Marten Transport — Shares of the trucking company slid almost 3% after third-quarter earnings came in lower than analysts anticipated. Revenue and operating income were also lower than the forecasts from three analysts polled by FactSet. Supernus Pharmaceuticals — Shares popped as much as 5% after Supernus Pharmaceuticals announced results from a Phase 2a study of an antidepressant therapy that showed a “rapid and substantial decrease” in depressive symptoms. — CNBC’s Hakyung Kim and Sarah Min contributed reporting.
Check out the companies making the biggest moves midday: Taiwan Semiconductor — Shares surged 12% after the company, which is the world’s largest producer of advanced chips, reported a 54% gain in net profit for the third quarter driven by strong AI-related demand. Shares of chip giants Nvidia and Micron each rose about 3% in sympathy following the quarterly results. Nvidia — The AI-darling was up nearly 3% after hitting a record high earlier in the trading session. Taiwan Semiconductor, which is rallying on its earnings report, is a major Nvidia supplier. Expedia , Uber — Shares of the companies moved in opposite directions following a Financial Times report, which cited people familiar with the process, that Uber explored a potential takeover bid for Expedia. The paper said Uber’s interest in the online travel company was at a “very early stage.” Following the report, Expedia rose more than 3%, while Uber fell more than 2%. Elevance Health — The health insurer dropped 12% after reporting a profit of $8.37 per share for the third quarter, excluding items, while analysts polled by LSEG anticipated $9.66 a share. The company cited “unprecedented challenges” in the Medicaid business. However, Elevance saw $44.72 billion in revenue, above the consensus forecast of $43.37 billion. Travelers — Shares jumped 7.6% after the insurance company posted a big earnings beat before the bell. Travelers’ third-quarter earnings came in at $5.24 per share, topping the $3.55 a share expected from analysts polled by LSEG. However, revenue missed estimates. Lucid Group — The electric vehicle maker tumbled 15% after the company announced a public offering of almost 262.5 million shares of its common stock to raise $1.67 billion. Blackstone — The stock rallied nearly 7% on the back of the alternative asset managers’ financial report. Blackstone reported third-quarter earnings of $1.01 per share on revenue of $2.43 billion. Analysts polled by LSEG had expected EPS of 92 cents on revenue of $2.41 billion. CSX — Shares slipped 5.9% after the transportation company reported disappointing third-quarter results. CSX’s earnings were 46 cents per share on revenue of $3.62 billion. That’s below the consensus estimate of 48 cents per share and $3.67 billion in revenue, per LSEG. Nokia — U.S.-listed shares of the Finnish telecommunications giant fell 3% after the company posted an 8% dip in third quarter sales due to a slowdown in the Indian market. However, its quarterly profit increased 22%. Alcoa — The aluminum producer’s stock shed more than 3% after the company reported third-quarter revenue of $2.90 billion, below the $2.97 billion LSEG consensus estimate. However, its adjusted earnings of 57 cents per share topped the 28 cents a share expected from analysts. Equifax — Shares fell 2.6% after the company’s guidance fell short of expectations. Equifax expects fourth-quarter adjusted earnings per share between $2.08 and $2.18, versus the $2.20 a share estimate from analysts polled by FactSet. The company guided for full-year adjusted EPS between $7.25 and $7.35, short of the $7.36 consensus estimate. Revenue for both the fourth quarter and full year also came in below expectations. Steel Dynamics — The stock gained nearly 5% after the steel producer beat earnings and revenue expectations for the third quarter. For the period, Steel Dynamics posted earnings of $2.05 per share on $4.34 billion in revenue, above the $1.97 per share on $4.18 in revenue that analysts were expecting, according to LSEG. Looking toward 2025, the company said it expects steel pricing to recover. Synovus Financial — Shares popped 5% after the company reported better-than-expected adjusted earnings per share for the third quarter. Synovus also guided for fourth-quarter adjusted revenue of $560 million to $575 million, above the $558 million expected from analysts polled by FactSet. Walgreens Boots Alliance — The stock dropped about 5%, paring some of the 15.8% it gained in the prior session and now on pace for its worst day since Aug 27. On Wednesday, Walgreens reported a fourth-quarter earnings beat and said it plans to close about 1,200 stores over the next three years. — CNBC’s Sean Conlon, Hakyung Kim, Alex Harring and Pia Singh contributed reporting.
Check out the companies making headlines before the bell. Elevance Health – Shares plummeted more than 10% after the health insurer reported weaker-than-expected third-quarter earnings. In a statement , CEO Gail Boudreaux said the company remains “confident” amid “unprecedented challenges in the Medicaid business.” Health care stocks Molina Healthcare and Centene also fell nearly 9% and more than 7%, respectively. Taiwan Semiconductor – The stock surged more than 8% after the company reported a 54% gain in net profit for the third quarter. Shares of chip giant Nvidia – one of TSMC’s clients – rose more than 3% in sympathy following the quarterly results. Expedia – Shares jumped nearly 5% after The Financial Times reported, citing people familiar with the process, that Uber explored a potential takeover bid for the online travel company. According to Financial Times sources, Uber’s interest in Expedia was at an “early stage.” Uber shares fell more than 2%. Lucid Group – The stock tumbled 18% after the electric vehicle maker announced a public offering of nearly 262.5 million shares of its common stock. Lucid also said its majority stockholder, Saudi Arabia’s Public Investment Fund affiliate Ayar Third Investment, will purchase more than 374.7 million shares of its common stock. Nokia – Shares slid more than 5% after the company reported an 8% dip in sales for the third quarter, citing a slowdown in the Indian market. Nokia’s profit for the period, however, increased 22%. Looking ahead, CEO Pekka Lundmark said in a statement that he expects full-year profit to come in “within the bottom-half” of its guidance range. CSX – The transportation stock fell more than 4% following the company’s weaker-than-expected quarterly results. For the third quarter, CSX posted earnings of 46 cents per share on revenue of $3.62 billion. That’s below the 48 cents per share and $3.67 billion in revenue that analysts were expecting, per LSEG. Alcoa – Shares rallied nearly 7% following the aluminum producer’s earnings beat. Alcoa reported third-quarter adjusted earnings of 57 cents per share, versus the 28 cents a share expected from analysts polled by LSEG. However, revenue came in at $2.90 billion, below the $2.97 billion consensus estimate. Kinder Morgan – The energy infrastructure stock slipped 2.1% after third-quarter earnings missed analyst expectations. Kinder Morgan posted adjusted earnings per share of 25 cents on $3.70 billion in revenue. Analysts polled by LSEG had forecasted 27 cents a share and $3.98 billion, respectively. — CNBC’s Alex Harring and Michelle Fox Theobald contributed reporting.