Coverage: Strong dollar hits earnings

While it might seem counterintuitive, a strong U.S. dollar is being blamed for lower corporate earnings this quarter. Companies from Procter & Gamble to Pfizer are reporting results below analysts’ estimates and blaming the demand for U.S. assets.

Paul Ziobro, Josh Mitchell and Theo Francis had this story for The Wall Street Journal:

The stronger dollar is slicing sales and profits at big American companies, prompting them to put renewed emphasis on cost cutting and cramping the broader U.S. economy.

The currency effects are hitting a wide swath of corporate America—from consumer products giant Procter & Gamble Co. to technology stalwart Microsoft Corp. to pharmaceuticals company Pfizer Inc. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping up with dollar-based costs.

Even booming companies are contending with the currency fallout: Apple Inc. reported surging profits Tuesday, sparked by demand for its new bigger-screen iPhones, but it also pointed to the dollar as a drag on results.

Fortune’s Phil Wahba said companies that rely on tourism would also suffer, as visitors won’t be able to afford to purchase as much on their U.S. trips:

U.S. retailers that rely disproportionately on tourism are likely to suffer the most. Indeed, Tiffany president Frederic Cumenal, who will become CEO in April, said he expects pressure from the strong U.S. dollar to persist throughout 2015 and hurt sales to tourists in the U.S.—foreign tourists account for 40% of sales at Tiffany’s flagship on Manhattan’s Fifth Avenue, a store that on its own generates one-eighth of company sales. HBC’s Saks Fifth Avenue chain is also dependent on tourism: its big Manhattan store drives 20% of its sales.

While the U.S. Travel Association expects international visits to rise 4.1% this year, there are concerns tourists might shorten their stays, and cut back on shopping while here. But even a meat-and-potatoes retailer like Wal-Mart Stores, with 41% of sales abroad, could feel the pinch.

Consumer goods companies, which went global decades ago, are particularly exposed. Avon Products is struggling and only gets 15% of its sales in the United States, making it particularly vulnerable to the greenback’s ascent. It is also, just like P&G and Kimberly-Clark, exposed to the foibles of the Venezuelan bolivar which last year drove Clorox out of that market altogether.

Writing for The New York Times, Landon Thomas Jr. pointed out the current economic state is helping consumers at the expense of corporations:

Yet while the American consumer may be cashing in on lower oil prices, rock-bottom interest rates and — for those planning trips to Paris and Rome — a strong dollar, a growing number of big American multinational companies have begun to suffer from these very same trends.

On Tuesday, Procter & Gamble and Caterpillar, which export many of their products overseas, blamed a weak global economy and a too-strong dollar for their disappointing earnings. A day earlier, Microsoft had also cited a robust dollar for its slack results. The dollar index, which measures the value of the dollar against six other major currencies, is up 17.7 percent since June 30.

Stocks fell sharply across the board on Tuesday, although the major market measures recovered some lost ground by the end of the day. The benchmark Standard & Poor’s 500-stock index closed down 1.3 percent. The Dow Jones industrial average ended down 1.7 percent, and the technology-heavy Nasdaq composite index ended down 1.9 percent.

Bloomberg’s Cécile Daurat and Liz Capo McCormick wrote that earnings this season were showing the companies who had placed the proper hedges and those who were having trouble managing their exposure to currencies:

“You have these companies that have figured out how to understand their exposures and manage them and you have the others that don’t,” said Wolfgang Koester, chief executive at FiREapps, a Scottsdale, Arizona-based company that advises businesses on reducing the impact of currency swings. “You are seeing an increased amount of people being now forced by the markets to look at their currency exposures.”

While 77 percent of Standard & Poor’s 500 Index companies have beaten analysts’ estimates so far this earnings season as the U.S. economy weathers a slowdown in global growth, the dollar’s advance is making American goods and services more expensive overseas, eroding sales. The dollar’s surge has taken some companies by surprise, including United Technologies which Monday cut an annual outlook that was just a month old.

Money has flooded into dollar assets in recent months as the world’s largest economy outperforms its developed peers and the Federal Reserve prepares to raise its main interest rate from the zero-to-0.25 percent range it’s been in since 2008.

The U.S. Dollar Index rose to the highest since September 2003 on Monday, adding to this year’s 4 percent gain. The measure, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six trade partners, surged 5 percent last quarter.

So while the strong dollar is actually a drag on multi-national earnings, it’s hard to argue that overall a strong currency is bad. If the demand for U.S. currency continues, companies will simply have to find another way to earn money. Or analysts and other Wall Street watchers may need to lower their outlooks for corporate profits in 2015. Either way, now’s the time to book that overseas trip and for consumers to take advance of their purchasing power, something that will be good for the overall global economy.