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Luxury retail stocks starting to diverge on China

China has been sending some encouraging economic signals recently, capped off by a 7.9 per cent increase in its gross domestic product in the fourth quarter. That marked its first quarterly acceleration in economic growth in two years.

Yet, some of the stocks of luxury retailers – many of which have tied their fortunes to the Chinese consumer market – continue to struggle.

Case in point: Coach Inc. fell more than 14 per cent on Wednesday in early trading, after the handbag maker reported a slight increase in its fiscal second-quarter earnings and sales over last year, but missed expectations. Much of the blame has been heaped on the U.S. market, where sales increased just 1 per cent during the quarter.

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"Looking ahead, we're confident in our ability to address the near-term challenges in North America while leveraging the global opportunity, as we continue to evolve the Coach brand," said Lew Frankfort, chairman and chief executive of Coach, in a statement.

However, China is the source of the company's aspirations: It opened 13 retail locations there during the quarter, bringing the total there to 117 – or about a third of Coach's retail stores worldwide. Sales in China rose 40 per cent.

Of course, Coach isn't the only luxury retailer that has expanded aggressively in China, where wealthy consumers have shown a strong desire for Western luxury brands. This expansion helped drive the likes of Coach, Tiffany & Co., LVMH, Richemont and Burberry to stratospheric heights during the best days of conspicuous consumption in China – but also threatened the bull market in luxe when China's economic growth sputtered.

Interestingly, luxury retailers are no longer moving in a tight pack. Coach is the most wounded, sliding 35 per cent since March 2012. Tiffany has fallen 14 per cent since March, but has rebounded some 25 per cent from its recent low in June. Burberry is 14 per cent off its recent high in 2012, but has bounced 36 per cent since October.

Meanwhile, LVMH and Richemont are going strong: Though concerns about China's economy hit the stocks briefly last year, both are near record highs today.

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