China retail recovery encouraging but uncertainty remains

The initial signs of a recovery in consumer spending for traditional Chinese retailers are encouraging, but the sustainability and degree of the turnaround remains uncertain, says Fitch Ratings.

Retailers such as Golden Eagle Retail Group Limited and Parkson Retail Group Limited have observed better sales after years of decline due to China's challenging department store environment since 2014, which was brought about by changing consumer shopping channel preferences and a lack of store differentiation.

Same store sales growth for Parkson turned positive in 4Q16 at +1.4%, after reporting a decline of 9.0% in 9M16 and a consecutive decline since 2013. Same store sales for Golden Eagle only declined by 4% for full-year 2016, compared with a 9% decline in 1H16. Fitch believes the recovery is partly driven by consumers bringing back some overseas spending.

Cosmetics, sportswear and outdoor as well as children's wear and toys product categories have performed well, while the outlook for apparel remains challenging.

A pick-up in luxury spending has also been observed, with watch retailer Hengdeli Holdings benefiting from its China retail segment turning positive in 2H16, compared with a decline of 8.9% in 1H16 following declines since 2013.

The improvement also follows retailer efforts to transform their offerings over the previous few years to stay relevant for consumers. Golden Eagle, for instance, increased the number of its lifestyle centre format stores in 2016 to 12 out of its 31 stores in operation to represent more than 60% of its gross floor area, up from only seven lifestyle stores in 2013. The lifestyle centres includes offerings like exclusive brands, supermarkets, food and beverage concepts and other retail formats and services to complement the traditional department store format.

However, most retailers have only noted a more meaningful recovery since 4Q16 after facing declining sales over the past two to three years, which has hurt profitability. The Negative Outlook on Golden Eagle reflects its high leverage, which will remain until it is able to generate cash from residential property sales or sees a sustainable turnaround in the core business. The Outlook is also Negative for Parkson, reflecting uncertainty over its ability to refinance or repay its USD500 million (CNY3.2 billion) bonds maturing in May 2018.