Gold consumption cautious, Chow Tai Fook closed over 100 stores in the first half of the year

The high-level volatility of the gold price is rapidly cooling consumers' enthusiasm for gold consumption.

On July 23, Chow Tai Fook (1929.HK) released its operating data for the three months ending June 30, 2024.

In the second quarter of this year, Chow Tai Fook's overall retail sales fell by 20% year-on-year. In mainland China, retail sales fell by 18.6% year-on-year; while in Hong Kong, Macau, and other markets, they fell by 28.8% year-on-year.

Looking at the products, same-store sales of gold jewelry and products in mainland China by Chow Tai Fook dropped by 27.9%; while jewelry inlay, platinum, and K gold jewelry fell by 31.7% year-on-year. In Hong Kong and Macau markets, the declines were 33% and 31.3% respectively.

Chow Tai Fook attributed the decline in same-store sales to the continued impact of the macro environment on consumption, as well as the high gold prices causing an overall impact on the demand for gold jewelry in the industry.

Under sales pressure, Chow Tai Fook continued its rare store closure actions from the first quarter, net closing 95 jewelry retail points in the second quarter to 7,659 stores. In mainland China, Chow Tai Fook has already net closed 123 stores in the first half of this year.

Regarding the store expansion target for 2024, a Chow Tai Fook spokesperson told Wall Street News · TradeWind01: "Our goal is to consolidate and enhance our market leadership with prudent capital management, creating sustainable shareholder returns. Store size is not the only growth consideration. We must remain vigilant and flexible, effectively allocate resources, manage the retail network, and respond to the ever-changing business environment and external factors."

Since Chow Tai Fook proposed the "channel sinking" strategy in 2018, it has achieved rapid expansion through franchisees.

In the mainland China market, Chow Tai Fook's store count increased from 2,449 stores as of March 31, 2018, to 7,408 stores as of March 31, 2024. Within six years, the number of stores has more than tripled, surpassing the target of opening 7,000 stores by the 2025 fiscal year.

In the second quarter of this year, the sales of priced products by Chow Tai Fook became one of the few performance highlights. The proportion of sales of priced products increased from 5.7% in the same period last year to 15.8%. Priced products have a higher gross profit margin, driving an overall increase in Chow Tai Fook's gross profit margin in the second quarter of this year.

Compared to weight-based products, the profit impact of gold price fluctuations on priced products is not significant.

In the sales of priced products, Chow Tai Fook sells gold jewelry to franchisees at a fixed markup, and franchisees then add their markup before displaying the final selling price in stores.

Wall Street News · TradeWind01 learned from sources close to Chow Tai Fook that after the second-quarter performance announcement, the management of Chow Tai Fook believes that if the gold price remains high for a long time, consumers may shift towards priced products. Chow Tai Fook can attract consumers by lowering unit prices and improving designs.

Regarding the future trend of gold product consumption, a Chow Tai Fook spokesperson also told Wall Street News · TradeWind01 that the fluctuation in gold jewelry demand is an industry-wide phenomenon, and when the gold price stabilizes, the pent-up market demand will recover "In particular, basic needs such as weddings will continue to drive overall sales. We expect Chinese consumers to continue to prefer high-quality gold jewelry that embodies Chinese culture and exquisite craftsmanship. Leveraging our design and craftsmanship advantages, we will maintain our leadership position, continue to optimize our product portfolio, and meet the diverse needs of customers," the spokesperson said.

On July 24th, Chow Tai Fook's stock price plummeted by 6.57% once again, closing at HKD 7.39 per share, hitting a new low for the year with a year-to-date decline of 35.96%