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Industry’s New Millstone: Currency Fluctuation

The currency bogeyman is back, and has plans to wreak increasing havoc on European luxury — and high-street — companies’ global revenues.

Various currencies.

The currency bogeyman is back, and has plans to wreak increasing havoc on European luxury — and high-street — companies’ global revenues.

This story first appeared in the April 16, 2014 issue of WWD.  Subscribe Today.

Few companies have escaped his touch. Firms from Salvatore Ferragamo to Tod’s, Hermès to Adidas and Wal-Mart Stores Inc. to L’Oréal have flagged currency fluctuations as a drag on top- and bottom-line growth in 2013 — and for the year ahead.

On Monday, L’Oréal said currency fluctuations had a minus 5 percent impact on its first-quarter sales. Last week, Marc Puig, chairman and chief executive officer of Puig Group, said company revenues advanced 1 percent to 1.5 billion euros, or $1.99 billion, but would have risen 5 percent on a constant currency basis. “[Last] year was a bit more complicated than we expected,” said Puig. “Our growth rate at a constant exchange rate was a reasonable one, 5 percent, but when we translate our sales into euros, the strength of the euro compared to the dollar and other emerging-market currencies had a significant impact. And that has continued this year.”

It has been a constant refrain over the last few months. In March, Swatch Group ceo Nick Hayek said foreign exchange variations could dent the group’s revenues by up to 500 million Swiss francs, or $570 million at current exchange, this year. The world’s biggest watchmaker registered a negative currency impact of 50 million Swiss francs, or $55.8 million, in February alone, he revealed.

“So if this situation remains as it is today — I would not even like to think it gets worse, but it could get worse, but we are all not pessimistic people — then you calculate yourself, the impact will be between 400 million to 500 million Swiss francs easily for the total year,” he said.

As far back as January, Burberry’s ceo Angela Ahrendts warned that at current levels, exchange rates will be a “significant headwind in the second half and beyond,” while the brand’s chief financial officer Carol Fairweather said the more powerful British pound would likely weigh on sales going forward.

She said sales transacted in U.S. dollars and in currencies pegged to the dollar could ultimately be dented once they are converted into pounds.

Indeed, those doing business in powerful denominations such as euros, pounds and Swiss francs are hurting in regions including China, India, South America, Australia and Russia, where local currencies are weaker by comparison.

In March, the pound hit a three-year high against the dollar, and a 12-month high against the euro. The ruble, meanwhile, has fallen a little more than 12 percent against the dollar this year, and is currently trading at 3 cents.

“There are two ways that currency is currently impacting the brands’ financial results,” said Helen Norris, director of luxury equity research at Barclays. “The first is that there is a loss in revenue as currencies weaken relative to the euro. This has hit revenues by around 5 percent in 2013, and we forecast an average, low-single-digit hit in 2014 based on current spot rates. However, there is also a gross margin impact given that the majority of goods are manufactured in Europe, where the currency has been stronger.”

Stefano Corneliani, director of luxury and consumer goods at Intermonte Corporate Finance in Milan, said it’s the potential for long-term impact on profits that is giving companies pause for thought.

“While in the short term luxury companies may be protected by hedging contracts, in the mid- to long term, if the [issues remain as they are], companies will be hurt significantly. In absence of a real pickup of demand in Europe, luxury companies will have to challenge a very tough 2014 and 2015, no matter how effective they will be in developing collections and retail,” he said.

Luxury and mass brands disagree about how to cope with the currency issue: Many have already raised their prices, while others say hikes are on the way. Others, still, say raising prices to counteract currency fluctuations is madness.

Earlier this month, Apple Inc. hiked its App Store prices in countries such as India, Australia, Indonesia, Turkey and South Africa as a counterweight to the declining value of those countries’ currencies. Puma has taken a similar tack.

“We actively hedge as much of our foreign currency exposure as is possible,” said Michael Lämmermann, Puma’s chief financial officer. In addition, retail prices have been raised where the markets will bear it, in order to offset the decline of those currencies, he added.

Of all Germany’s big players, Adidas has been the most up-front about the impact of currency effects on its business. At the group’s financial results presentation in early March, cfo Robert Stalker predicted that combined foreign exchange issues could impact 2014 operating profit to the tune of 150 million to 250 million euros, or $206 million to $344 million.

Stalker did not rule out selective price increases, possible shifts in business models and the group’s future investment focus. Adidas board members have mentioned the group will also evaluate such issues as sourcing strategy.

Ferragamo, meanwhile, will likely raise prices soon.

“We will probably consider increasing prices after May with new products,” said Ernesto Greco, cfo of Ferragamo, during the release of the company’s 2013 profits. He said profit margins had the potential to grow to 25 percent but would be hindered by “adverse” currency fluctuations. “We need more time. We will grow, but at a slower speed than the last couple of years.”

Stefano Sassi, ceo of Valentino, said the company has not yet increased its prices, but may well do so. “We are selling fall-winter with prices that had been defined. We will think about it for spring-summer, when we start selling that season, in about four months,” he said.

Norris of Barclays said the beauty of the luxury goods sector is that it is an industry with pricing power.

“This does mean there is scope to partially offset the negative currency impact through price. For instance, Louis Vuitton increased prices in Japan by 24 percent last year. Hermès increased prices by 10 percent in early February in Japan, and by 5 percent in other regions in January, versus 3 percent globally in 2013. Some other brands have been more cautious, particularly in a global market where competition is intensifying and the market slowing.”

In late March, during Hermès’ full-year results presentation, ceo Axel Dumas warned analysts to expect a drop in profit in 2014 given strong currency headwinds, particularly in Japan, with its declining yen. The hike in value-added tax in the island nation, which took place last week, is likely to further dampen demand.

By contrast, Prada’s ceo Patrizio Bertelli has cautioned against “looking at currencies.” He said it’s “hysteria” to try to counterbalance currency changes with price increases. “To have a purely financial vision is hara-kiri from a commercial point of view. We must evaluate different commercial aspects in different countries, and we must know how to work well also when currencies are not favorable,” he said during a marathon meeting with investors and the press last month.

Corneliani of Intermonte said a slowdown in demand in emerging markets makes big price increases particularly difficult. “Further increases in emerging markets would amplify price differentials further among the regions. It’s not a secret that prices in China are 30 to 40 percent higher than they are in Europe,” he said.

Online retailer Asos said earlier this month that retail sales in the first half for its Rest of World geographical region were up 14 percent at actual exchange. However, they would have risen 23 percent had there not been currency headwinds. Asos’ attitude to currency and pricing is similar to that of Bertelli.

In May, the company will launch phase one of a local pricing strategy, “another key development on our journey to becoming a truly global retailer,” the company said in its interim report earlier this year. “This will allow us to offer locally competitive pricing and perform locally relevant promotional activity in our strategic markets.”

Hennes & Mauritz, meanwhile, takes a more stoical approach: “As long as there are different currencies around the globe, we will always have currency effects due to the constant fluctuations. Sometimes it is positive for H&M and sometimes it is negative. This is a fact for every global company,” said Nils Vinge, the retailer’s head of investor relations.

“We always hedge our purchases until we pay the suppliers in order to lock in the mark-up. And regarding pricing, we always start from the customer and follow our business proposition, which is to offer the best combination of fashion, quality, price and sustainability,” he added.

As for currency headwinds, the company increased its prices in February “around 2 percent, but really it was a hedging increase to cover currency fluctuations.”

The impact is being felt at every price level and in every product category. Last October, Wal-Mart forecasted a 3 to 5 percent net sales increase for fiscal 2015. But now, given currency fluctuations, it is being more cautious. “Given these factors and the ongoing headwind from currency exchange, we expect to be at the low end of the net sales guidance,” Charles Holley, the cfo of the discount giant, said last month.

Jean-Paul Agon, chairman and ceo of L’Oréal, is equally cautious. The company expects the global cosmetics market’s growth to be in the same order as 2013’s — between 3.5 and 4 percent. However, “the currency effect should once again in 2014 be unfavorable for us, [but] we are less exposed than others to certain countries that have suffered strong devaluations in their currency,” said Agon.