Shedding Light on Retail's Exposure to Japan

by: Wall Street Strategies

By Brian Sozzi

Let's talk about the earthquake and subsequent heart-wrenching devastation in Japan and the impact on Western retailers. Although retailers of all kinds are pushing into China with the force of a tsunami, keep in mind Japan was the first China for many companies hawking high-end jewelry and run of the mill apparel. I don't think any retailers were directly impacted by the mountain of water running through the farmland, but there may be an indirect impact. If there is a Chernobyl style nuclear meltdown, Tokyo being some 150 miles away does house some prominent luxury brands.

I attribute the stronger sell-offs today in shares of Tiffany & Co. (NYSE:TIF) and Coach (NYSE:COH) to the premiums the stocks are valued at when compared with the broader retail sector and equities markets. Consequently, any swift decline in sales, despite muddling growth in the country for each, raises the risk to future earnings. Both companies, in my view, have been managing their Japanese businesses to profitability rather than new unit growth.

Note to investors. It's not the amount of sales in which retailers derive from Japan per se, it's the store clustering in close proximity to the damaged areas and the profit generated by operations in Japan.

Drilldown into Tiffany & Co. and Coach:

  • Tiffany & Co. (TIF) stores are clustered along the coast of Japan
  • Coach (COH) has a store around the Fukushima area (nuclear concern central) and in Sendai
  • Coach and Tiffany & Co. have stores in Japan's major airports

Rundown of retail and Japan overall:

  • Japan accounts for 23% of hard and soft luxury goods worldwide marketplace (U.S. and Europe at 25%; China 13%)
  • Hermes (OTCPK:HESAF): 20% of annual sales
  • Louis Vuitton (OTCPK:LVMHF): 10% of annual sales
  • Swatch (OTCPK:SWGNF): 5% of annual sales
  • Tiffany & Co.: 19% of annual sales
  • Coach: 20% of annual sales

I am still pouring over Wal-Mart's (NYSE:WMT) exposures to Japan (operates under Seiyu banner in Japan).