The stronger, still-strengthening dollar is going to take a toll on U.S. companies with big international businesses.
Based on the accelerating headwind of foreign currency translation, Wells Fargo Securities analyst Paul Lejuez Thursday reduced his 2015 earnings estimates for Gap Inc., The TJX Cos. Inc., Abercrombie & Fitch Co. and Lululemon Athletica Inc.
His colleague Evren Dogan Kopelman did the same for VF Corp., PVH Corp. and Ralph Lauren Corp. based on “negative currency impact given the strengthening U.S. dollar and these companies’ significant international exposure.”
The effects of currency translation have become harder to pinpoint, but more certain to hurt U.S. firms’ profits as the dollar has strengthened and other currencies have waned in the recent months. Over the course of the past 90 days, the euro is off 11.4 percent from its peak against the dollar, while the pound and the yen are both off 6.8 percent.
Kopelman’s modeling embraced an exchange rate for 2015 of $1.15 per euro and $1.52 per British pound, versus previous estimates of $1.27 and $1.61.
None of the seven companies covered in the analysts’ reports received a change in rating — all remain at “market perform” except for Ralph Lauren and Lululemon, which are rated “outperform” — but earnings estimates for 2015 were lowered for all.
Lejuez noted, “If current spot rates hold, the Canadian dollar will be down 10 percent [versus the U.S. dollar] in 2015, the yen down 10 percent, the euro down 13 percent and the [pound] down 7 percent.” The steepest declines for all these currencies except the euro are expected to occur in the second quarter, while the euro’s weakening is expected to be greatest in the first quarter.
Full-year earnings expectations were reduced to $2.85 a share from $2.94 for Gap, where roughly 7 percent of sales come from Canada, 6 percent from Japan, 4 percent from the U.K. and 1 percent from the remainder of Europe.
At A&F, the revised expectation is for earnings of $1.44 a share, down from $1.54. Wells Fargo estimates the company derives 20 percent of its sales from Continental Europe, 8 percent from the U.K., 4 percent from Canada and 1 percent from Japan.
For TJX, the reduction for 2015 was to $3.36 from $3.44. About 12 percent of sales come from the U.K., another 3 percent from the rest of Europe and 10 percent from Canada.
Lululemon’s earnings per share estimate for the year was lowered to $2.05 from $2.09. The Vancouver-based firm’s home market of Canada accounts for about 23 percent of its sales, Wells Fargo said.
Among companies in Kopelman’s coverage group, PVH’s earnings this year are expected to tally $8.01, down from the previous $8.30 estimate, while VF is now expected to generate EPS of $3.41, 9 cents below the earlier estimate.
Ralph Lauren’s 2015 and 2016 earnings are projected to be $8.47 and $9.54, respectively, reduced from $8.51 and $9.83.
“We believe the margin recovery and Polo international expansion opportunity at RL will help sustain the multiple despite currency pressures,” Kopelman wrote of the company’s valuation of between 17 and 18 times its earnings.
She also noted that top-line pressure at PVH, brought on by both currency and the closure of most of its Izod stores, could be offset to a degree by savings from the integration of the 2013 Warnaco acquisition.
The currency conundrum is playing a role in virtually all the financial results being disclosed by U.S.-based firms with significant overseas or Canadian businesses. Jefferies analyst Randal Konik noted that Coach Inc.’s second-quarter results, released this morning, included not only a 22 percent decline in North American same-store sales, but also an 18 percent decline in sales in Japan which, when adjusted to eliminate the effects of foreign currency fluctuation, is transformed into a smaller 7 percent decline.
In a research note issued after the recent Outdoor Retailer show in Salt Lake City, J.P. Morgan analyst Matthew Boss pointed to “three areas of near-term exposure” for VF with respect to currency, the first being that about 22 percent of sales come from Europe, with about two-thirds in euro-zone markets. Also, about 7 percent of sales come from the Americas outside the U.S., and its European headquarters is based in Switzerland.