China's May retail sales shows steady consumer demand but growth is certainly moderating driven by the drag on jewelry and luxury goods while clothing and apparel are performing within expectations. More important, online retail sales continue to outperform, bringing penetration higher to 12.7%. This is a positive for ecommerce giants including Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Wal-Mart's (NYSE:WMT) Yihaodian. I remain bullish on China's ecommerce and online retail space due to the growing convenience and the demand for O2O services. On the other hand, I would remain cautious on jewelry makers such as Tiffany's (NYSE:TIF) that has high leverage to China and Coach (NYSE:COH).
May retail sales increased +10% y/y and that was largely in line with consensus 10.1%. Jewellery was the main drag as sales declined -2% y/y vs. a +5% growth in the prior month. This comes as no surprise given the weak outlook communicated by domestic retailers including Chow Tai Fook and Luk Fook that cited weaker demand as consumers have gone overseas. This could potentially be a negative to TIF's China operation as the broader industry faces higher comp from last year's gold rush. In the near-term, maintaining profitability will be a key challenge and there is really no visibility of a rebound, in my view.
On the apparel side, clothing, shoes and hats saw a +6% y/y growth, a sharp deceleration vs. the prior year's +12.5%. Higher comp may have been partially responsible for but the weak macro environment cannot be discounted as it may have caused consumers to pull back on their discretionary spending. One area of insight may be in cosmetics where sales growth declined 200bps from the prior year.
The more positive note on the retail figures was ecommerce, which grew +27% y/y and account for 12% of the total retail. China continues to lead the world in ecommerce penetration with US second at 10%. In short, ecommerce penetration is likely to go higher due to the increased convenience, mobile penetration and tech savvy demographic. Interestingly, online food grew by +37% y/y, underscores Amazon's (NASDAQ:AMZN) focus on expanding food delivery services in the US and abroad (see - Amazon: Fresh Groceries At Your Doorstep). Clothing grew +16%, which may have resulted in lower offline sales at department stores. In short, I remain bullish on BABA and JD as I think both ecommerce are well positioned for the trend. Among the two, I prefer BABA given its superior platform and logistics services.
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