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US earnings hit from strong dollar sparks worry

By Agencies - Jan 28,2015 - Last updated at Jan 28,2015

NEW YORK — Earnings Tuesday from American multinationals revealed a downside to the comparatively robust US economy: The drag from a rising dollar.

Dow component Procter & Gamble (P&G) cited "unprecedented" foreign-exchange fluctuations as it missed earnings expectations and slashed its profit outlook.

Chemical producer DuPont and technology giant Microsoft also highlighted the strong greenback as a headwind for earnings, adding to commentary last week from fast-food chain McDonald's and consumer goods firm Kimberly-Clark. 

"US companies are not immune to global weakness," said Christine Short, senior vice president at Estimize, a financial tech company that collects earnings research.

Foreign exchange "is going to be a big impact", she added.

The dollar has been on a tear in the wake of mostly improving data on US jobs and economic growth. That has lifted expectations that the US Federal Reserve will raise interest rates before other major central banks. 

A strong dollar has upside for US companies that import goods or raw materials from weak-currency economies and sell the goods in the US.  Analysts have said some sectors could benefit from this differential, such as clothing retailers.

However, many US multinationals face challenges due to a strong dollar, which last week hit an 11-year high against the euro, which itself has jumped against the battered Russian ruble.

The strong dollar can sting multinationals if they import goods or materials from the US or other strong-currency markets into a weak-currency state like Russia if prices to consumers are not adjusted. 

Companies also suffer when overall earnings are transposed from weak currency markets like Russia back into dollars for reporting purposes.

In P&G's case, the grim commentary on foreign exchange also reflected a negative impact from Switzerland. P&G's European headquarters is Geneva, which means it also has exposure to the Swiss franc, which has risen sharply following an unexpected move by the Swiss central bank earlier this month to abandon the franc's cap against the euro.

P&G projected 2015 earnings would be hit by 12 per cent, or at least $1.4 billion, due to currency effects.

"This is the most significant fiscal-year currency impact we have every incurred," P&G chief financial officer Jon Moeller said in a conference call with analysts.

Kimberly-Clark, another leading consumer products company, last week announced a $462 million charge in Venezuela stemming from the revaluation of its assets due to the plummeting value of bolivar. 

Kimberly-Clark Chief Executive Tom Falk predicted a negative currency earnings hit of more than 15 per cent in 2015.

At McDonald's, weak currencies in Russia and Ukraine battered earnings in 2014 and the company expects more of the same in 2015 in those countries and others.

The fast-food giant forecasts a full-year impact of 35-40 cents per share in 2015, said McDonald's chief financial officer Pete Bensen.

Raising prices abroad 

To offset the impact of the strong dollar, US companies are seeking to raise prices in badly hit markets. 

"Generally, the principle is that over time you recover the amount of the price effect," P&G's Moeller told reporters in a conference call.

That means if a good is in a market where the dollar has appreciated 20 per cent, the price of the good to consumers will also increase by 20 per cent, but the jump may not happen all once, Moeller said.

Other steps include boosting local sourcing of goods and materials in Russia, Venezuela and other hard-hit markets, he added.

However, company officials acknowledged that price increases are difficult in some cases, such as when the economy is weak, as with eastern Europe.

"This is just a bit of unchartered territory," Kimberly-Clark's Falk said. "If the Russians and some of the other Eastern European economies declined by mid-single digits, which is what some of the forecasters say, we'll see how that plays out in terms of consumer purchasing power." 

Separately, New York restaurant owner Jeremy Merrin has seen business droop in recent weeks at his Havana Central eatery in Times Square. The reason: Not enough international tourists.

"We're fighting a double-whammy," said Merrin, who owns three restaurants and is on the board of the New York State Restaurant Association. "Not only is the dollar going up and making things more expensive, Europe as a whole is not doing well."

International tourists to the United States spend more than $200 billion annually on travel, hotels, dining and shopping, but growth in 2015 is expected to decelerate as would-be visitors balk at the stronger dollar and grapple with weaker economies at home.

"That could impact the length of their stay and the composition of their spending in the United States," said David Huether, senior vice president, research, at the US Travel Association, which sees the influence of the stronger dollar becoming more severe in 2015's second half.

Travel experts hope some of the drop in spending in the United States will be made up for by increased tourism from China, where visitors can now get a visa that lasts 10 years. 

Lower gas prices and a stronger US economy also may encourage more domestic travel, they said.

Still, some retailers, including Tiffany and Co., are already feeling the impact.

"The strong dollar has created headwinds for foreign tourists in the United States," said Mark L. Aaron, vice president of investor relations at Tiffany, which warned of slower sales to tourists at its flagship New York store.

"Tiffany is the first poster child of this issue," said Craig Johnson, president of consulting firm Customer Growth Partners. "A lot of retailers might be hit to some degree."

He added that the trend could slow the growth of other successful luxury brands that depend heavily on tourists. 

"We believe that Michael Kors and Kate Spade will still be showing solid growth, but not the robust, double-digit we've seen over the last couple of years," he indicated.

Kate Spade did not respond to a request for comment. Michael Kors declined to comment.

Rising dollar

The dollar has climbed about 15 per cent against the yen and the euro over the past six months. It is up about 6 per cent against the won.

Chris Gaffney, senior market strategist at EverBank Wealth Management in St. Louis, expects the strong dollar will affect a number of US sectors that serve foreign tourists, including airlines, hotels, and retail. 

Companies with tourism operations abroad could see relief because "for American tourists, Europe is on sale," he said.

Morningstar equity analyst Paul Swinand said department store chains with a large presence in some of the "gateway cities" could see a 1 per cent or 2 per cent slip over the next year because of lower tourist spending.

A 10 per cent appreciation in the dollar typically results in about 2 per cent fewer international visitors annually, indicated Adam Sacks, president of consulting company Tourism Economics, which expects the number of international visitors to climb by 3.5 per cent in 2015, compared with 5 per cent annual growth over the past 10 years.

Growth in the number of foreign tourists coming to the United States had already started to slow last year, largely because of economic problems in home countries. 

The number of Japanese visitors through last October was 4 per cent lower than the previous year, according to the most recent Department of Commerce numbers. The number of Venezuelans was off 18 per cent, but Mexican and Chinese tourists both were up more than 20 per cent.

"Despite the higher dollar, the Chinese have saved money to travel," said Evan Saunders, chief executive and co-founder of Attract China, which is expecting many more Chinese tourists this year.

He added that the Chinese tourists his company works with are eager to try everything from Shake Shack to outlet malls. 

"They want to do what they have seen in TV shows or American movies," he remarked.

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