Nobody can say with any real certainty how widespread the coronavirus outbreak will become or what overall or long-term impact it will have on market economies and global trade. Surrounded by such uncertainties, the pandemic has quickly catapulted high on the list of hot risk topics for business leaders everywhere.
A recent analysis conducted by FactSet finds that, among 364 S&P 500 companies that conducted fourth-quarter earnings conference calls from Jan. 1 through Feb. 13, 138 (38 percent) mentioned “coronavirus” (also called COVID-19) during the call. Among 11 total sectors analyzed, the highest number of companies that discussed the coronavirus on earnings calls were in the industrials (26), information technology (26), and healthcare (24) sectors.
Of earnings calls analyzed by Compliance Week, all executives stressed the health of their employees, business partners, and customers take paramount priority over worries about business continuity and recoverability plans at this time. Still, from a business impact standpoint, this has meant the temporary shutting down of factories and the closing of storefronts, restaurants, hotels, offices, and more in the affected regions, resulting in the significant disruptions to business operations, global supply chains, and global trade across all industries.
Delays in production and product delivery, capacity challenges, and industry-wide port congestion are just a few of the risk management hurdles companies are going to have to overcome for the foreseeable future. Alexandre Ricard, chairman and chief executive officer of alcoholic beverage company Pernod Ricard, summarized the current situation succinctly: “The reality is, over the last few weeks, COVID clearly impacted our performance in China—clearly impacted, let’s be clear, not just our business, but China as a country.”
In the short term are revenue losses. Tech giant Apple, for example, announced on Feb. 17 it does not expect to meet the revenue guidance it provided for the March quarter due to two main factors: iPhone supply shortages and reduced product demand in China. “All of our stores in China and many of our partner stores have been closed,” Apple said. “Additionally, stores that are open have been operating at reduced hours and with very low customer traffic.”
In the hospitality industry, Hilton Worldwide has closed roughly 150 of its hotels in China, to date, totaling approximately 33,000 rooms, said Chief Executive Officer Chris Nassetta on a Feb. 11 earnings call. Wynn Resorts, too, ceased its casino operations in Macau on Feb. 5. “During this time, while the casino is closed, our operating expense burn rate is roughly $2.4 million to $2.6 million a day, and that’s largely comprised of payroll to our 12,200 employees,” Wynn Resorts Chief Executive Officer Matt Maddox said on the company’s fourth-quarter earnings call.
Government-required factory shutdowns in China are also impacting manufacturing for several companies. Hyundai Motor Company, for example, on Feb. 7 announced a work stoppage related to the manufacturing of its vehicles in China, resulting in the partial disruption of production for all its models and totaling $35.4 billion, or 45 percent, of lost sales revenue. As a countermeasure, Hyundai said it is increasing its supply from domestic and Southeast Asian suppliers.
Tesla, too, is experiencing delays in the production of its Shanghai-built Model 3. “This may slightly impact profitability for the quarter but is limited as the profit contribution from Model 3 Shanghai remains in the early stages,” Tesla Chief Financial Officer Zachary Kirkhorn said on a Jan. 29 earnings call.
The fast-food industry is also taking a hard hit. Ka Wai Andy Yeung, chief financial officer of Yum China Holdings—which owns such brands as Pizza Hut and KFC—said during a Feb. 6 earnings call it has experienced “significant interruptions” due to the “temporary closure of our restaurants, as well as substantial decline in sales to the restaurant that remained open.” To date, Yum China has closed more than 30 percent of its restaurants.
Other restaurants that are taking a hit to their business include McDonald’s, which said it has closed hundreds of its restaurants in China. Starbucks, too, announced it has closed more than half of its stores in China and that it “continue[s] to monitor and modify the operating hours of all of our stores in the market in response to the outbreak of the coronavirus.”
A state of limbo
Other companies have been less willing, or are unable, to accurately estimate the full business impact. According to Factset’s analysis, 34 percent of executives among the 138 companies said during their earnings call they were not including any impact from the coronavirus in their guidance at all.
Walmart, for example, said in its latest earnings call, held Feb. 18, that it continues to monitor the Coronavirus outbreak and “has not included any potential financial effects in its assumption.”
Royal Caribbean similarly announced in a Feb. 13 update on the coronavirus that “too many variables and uncertainties” remain to make a reasonable forecast for 2020. From a risk management standpoint, the cruise line company said it has expanded its boarding restrictions, modified several of its itineraries, and has cancelled a total of 18 sailings in Southeast Asia to date.
Many companies continue to adjust their financial outlook as rapidly as the virus is spreading. For example, Ralph Lauren—which FactSet originally included in its analysis as one company that did not originally include any potential impact from the coronavirus outbreak in its guidance—turned around and announced on Feb. 13 that its fourth-quarter fiscal 2020 guidance is “now estimated to be negatively impacted by $55 million to $70 million in sales and $35 million to $45 million in operating income in Asia, driven by current trends in China, Japan, and Korea.”
Apparel and footwear company Under Armour CEO Patrik Frisk said in a Feb. 11 earnings call that, while supply-chain challenges from a material, factory, and logistics standpoint could have a significant material impact on its business for the year, it’s “electing to stay appropriately prudent and not prepared to quantify many of these elements today, as events could meaningfully evolve in the coming weeks.” Frisk said, currently, it’s only contemplating a first-quarter revenue impact to the APAC region, which it estimates to be about $50 million to $60 million, due to the “almost 600 mono-branded Under Armour doors in China currently closed.”
In the medical device industry, Medtronic Chief Executive Officer Omar Ishrak commented during a Feb. 18 earnings call that, as the Chinese healthcare system focuses on containing the spread of the virus, “hospitals in China have experienced a slowing of medical device procedure rates, and we are seeing procedure delays,” he said. “We do expect this to have a negative impact on our fourth-quarter financial results, but given the fluidity of the situation, the duration and magnitude of the impact are difficult to quantify at this time.”
A silver lining
Companies that will most efficiently be able to weather the storm are those that can realize business opportunities created by forces of market change, as China-based e-commerce company Alibaba Group said it is doing. In a Feb. 13 earnings call, Chief Executive Daniel Zhang noted how more employees are choosing to work from home and more consumers are migrating to online purchases of groceries and other daily necessities—the sort of services that Alibaba’s online retail business caters to.
Other business executives, drawing on past industry experience as it relates to severe acute respiratory syndrome (SARS) in 2003 and similar outbreaks, even expressed optimism about the long-term growth trends from the coronavirus outbreak. “The experiences we have had with similar situations in the past … show that, after a period of disturbance, consumption resumes stronger than before,” L’Oréal Chairman and CEO Jean-Paul Agon said in a Feb. 6 earnings call. “Therefore, at this stage, and assuming this epidemic follows a similar pattern, we are confident in our capacity this year, again, to outperform the beauty market and achieve another year of growth in both sales and profits.”
Coca-Cola Co. CEO James Quincey cautiously noted China’s economy was in a much different place during the SARS outbreak. “The effect was not particularly noticeable from a business point of view,” he said on a Feb. 21 earnings call. “It’s worth noting China’s economy is much bigger, and this could become more connected to the rest of the world.”
- Alibaba Group
- Food & Beverage
- global trade compliance
- Hilton Worldwide
- Hyundai Motor Company
- Pernod Ricard
- Ralph Lauren
- Risk Management
- Royal Caribbean
- Supply Chain
- Under Armour
- United States
- Wynn Resorts
- Yum China