Hong Kong retail sales dropped 6.9% y/y in June

Moderating visitor arrival growth might have contributed.

Hong Kong retail sales in June were at HK$37.1bn, down 6.9 y/y by value, which is slightly worse than the Bloomberg consensus estimate that was looking for 5.1% y/y decline.

According to a research note from Barclays, overall retail sales were still at a decline with the continued high base impact from the jewellery and watches segment last year.

The report also noted that by volume, June overall retail sales were down by 7.5 % y/y.

Barclays believes the further moderating visitor arrival growth in June might have partially contributed to the wider (than May) y/y decline as well.

Here's more from Barclays:

Mainland visitor arrival growth further moderated to 8% y/y in June: This compares to May growth of 13%, April growth of 15% and 1Q14 growth of +20% y/y.

Overnight visitors were only +3% y/y in June, same-day visitors were +11% y/y.

We continue to believe potential reason for moderating growth is visitors continue to diverge to travel destinations beyond Hong Kong, and the local sentiment against Mainland visitors could have had a small degree of impact as well.

Department stores sales swung back to y/y decline in June: Sales for department stores saw a drop of 3.6% y/y, after the brief pickup of +3% y/y in May.

Jewellery and watches continues to decline significantly y/y: Due to strong base effect from gold rush, jewellery and watches sales were still down by 28.2% y/y, compared to the May decline of -24.5% y/y and April decline of 39.9% y/y.

Medicines and cosmetics continued to grow, but at a slower rate: Medicines and cosmetics saw 6.9% y/y growth in June, slightly slower than May growth at 8.0% y/y.

Clothing and footwear marginally improved: Sales for clothing and footwear in June grew 6.9% y/y, marginally better than the 5.4% y/y growth in May.

Consumer durables declined; food, alcohol and tobacco sales grew: Consumer durables sales dropped 7.8% y/y in June, following the 5.2% decline in May. June sales for food alcohol and tobacco increased 8.6% y/y, better than the 6.5% y/y growth in May.

We continue to recommend that investors underweight most of the Hong Kong retail stocks.

We have an Underweight ratings on Trinity (891.HK) and an Equal Weight ratings on Sa Sa (178.HK) and Lifestyle (1212.HK).

We do not expect much of a catalyst from Hong Kong retail growth, which is a key component of their earnings.

We expect the divergence of Mainland visitors to other regions to continue, and we currently do not see resumption of stronger spending power in the Mainland visitors coming to Hong Kong.

Any government policies that limit the growth of Mainland visitor arrivals remains a negative risk to the sector as well.