Since July 2014, the U.S. dollar has advanced more than 20 percent against other world currencies. To many, having a strong currency might sound like a good thing, and in many respects it is. The dollar’s relative strength is a reflection of the U.S. economy, which continues to improve since the financial crisis.
While a strong dollar might be good for national pride, it’s been a major headache for multinational American companies. The most cited reason for subpar second quarter earnings, in fact, is the greenback. Financial number-cruncher firm FactSet noted in a recent report that the impact of the strong dollar was a recurring theme in many earnings reports, from Nike to Costco to AutoZone.
The reason? A strong currency makes U.S. exports and products more expensive to other countries, which might encourage them to switch suppliers. It also means that the value of overseas sales is reduced when it’s converted back into dollars.
In the last year, many countries and regions—including Europe, Japan and, most recently, China—have devalued their currencies, making their export prices more attractive to foreign buyers. The Colombian peso is down 23 percent against the dollar; the Turkish lira, 20 percent. The Brazilian real has lost close to 30 percent this year.
In the chart below, you can see the huge difference in second quarter earnings and revenue growth between S&P 500 companies that conduct less than half of their business within the U.S. and those that mostly focus outside the U.S.
From materials to information technology to consumer discretionary, no sector is immune. The only way to avoid the pitfalls of unfavorable foreign exchange rates is to restrict business to the U.S., an idea most growth-seeking companies wouldn’t entertain. Even if business were to remain stateside, revenue could still be hurt by a lack of foreign tourists, since a strong local currency makes travel and shopping more expensive for them.
Luxury jeweler Tiffancy & Co., for one, is well aware of this fact.
About a quarter of Tiffany’s total sales come from foreign markets, meaning the exchange rate has lately nibbled at earnings. Even though the company reported increased quarterly sales at international stores, profits fell 15 percent, from $124.1 million a year ago to $104.9 million. Tiffany is also seeing a marked decline in tourist shoppers to its flagship Fifth Avenue store this year because the dollar has made it more expensive to visit the U.S.
New York-based department store chain Macy’s has also been hit by the strong dollar, resulting in lower overseas profits and fewer tourist visitors. Chief Financial Officer Karen Hoguet even reported that the company’s worst performance, geographically, was in its major tourist markets. To counter flat year-over-year revenue growth, Macy’s will be closing 35 to 40 of its stores in early 2016, saving it some $300 million.
Macy’s isn’t the only department store that’s felt the negative effects of a stronger greenback. Walmart, the Bentonville, Arkansas-based retail giant, reported first-quarter revenue of $114 billion, down 0.1 percent from the same quarter the previous year. According to the store, global currency fluctuations were responsible for a loss of $3.3 billion in net sales. Another issue affecting revenue right now is Walmart’s decision to raise its minimum wage to $9 an hour.
Few companies are as American as Ford. Founded by Henry Ford in 1903, the Michigan-based automaker is known for its iconic brands such as the Mustang, Thunderbird and F-Series line of pickup trucks. Among the “Big Three” American automakers, which also includes General Motors and Chrysler, Ford was the only one not to be bailed out by the U.S. government in 2009. But in the first quarter, revenue dropped about $2 billion from the same time a year ago. Seventy percent of that drop, according to the company, was due to the effects of exchange rates.
If you haven’t heard of Yum! Brands, you might be more familiar with its ubiquitous fast food franchises KFC, Pizza Hut and Taco Bell. In recent years, Yum! has established a strong presence in dozens of foreign markets, including Canada, Japan, Australia and Malaysia—countries whose currencies have fallen this year against the dollar. In China, where the company operates 6,400 locations, sales declined by 4 percent year-over-year in the second quarter because of the strong dollar.
In its earnings report, the company stated that “foreign currency translation remains a strong headwind” and that it expected the exchange rate “to impact full year EPS (earnings per share) by about 5 percentage points.”
Johnson & Johnson
Maker of iconic American brands Band-Aid, Tylenol and Neutrogena, as well as many important pharmaceuticals and medical devices, Johnson & Johnson has recently benefited from the acquisition of biopharmaceutical firms Alios and Covagen. But because of wide exposure abroad, the New Jersey-based company reported sharply lower sales in the second quarter.
Procter & Gamble
Procter & Gamble is the world’s largest consumer products maker, known for its hugely popular billion-dollar brands Tide, Pampers, Crest, Folgers and many more. The Cincinnati-based company gets nearly two thirds of its revenue from foreign markets and maintains operations in more than 80 countries around the globe. The second quarter of 2015, however, was P&G’s sixth consecutive fall in quarterly sales, with more than $4.6 billion erased by foreign exchange rates. Like many multinationals, the company has been forced to raise prices in foreign markets to offset the effects of the dollar, which has only led to further declines.
At one time, the United States Steel Corporation, known commonly as U.S. Steel, was the largest corporation in the world, and the first to be capitalized at more than a billion dollars. Today the Pittsburgh-based company is worth just under $2.5 billion and is facing serious headwinds, as the strong dollar has made steel exports from Brazil, Russia and China—the world’s largest producer—much more competitive. As a result, U.S. Steel lost money in the first two quarters of 2015 and has had to lay off over 1,700 workers.
These are only a sampling of companies that have been hurt by the strong dollar and unfavorable exchange rates. By no means are they the only ones.
It’s important for investors to think long-term. Although it might not happen tomorrow, the dollar will eventually decline against other world currencies, helping to give American companies a more competitive edge.
In the meantime, consider the rest of the world on sale. Traveling to Europe, for instance, is now much more affordable for American tourists. Although the strong dollar might have hurt the bottom line of many multinationals, the real winners in all of this are the everyday American consumer.
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