The strong dollar and weak euro are stirring the earnings pot of global fashion companies, with some clearly benefiting while others suffer declines — and it doesn’t look like it will end anytime soon.
This story first appeared in the August 12, 2015 issue of WWD. Subscribe Today.
In March, the euro fell to a 12-year low against the dollar to $1.05 and while it has recovered slightly to $1.09, Deutsche Bank strategists predict that the euro will continue to fall to 90 cents against the dollar by the end of 2016 — and then keep falling to 85 cents by the end of 2017.
Whether or not the forecast proves to be true, companies are being forced to adapt to the changing currency landscape. One quick and easy step is to increase their prices in Europe. Some companies have also lowered prices in China, because the yuan is pegged to the dollar.
Chanel took this approach, dropping handbag prices in China, while raising prices in Europe in April after the first big euro plunge occurred. Classic handbags went up as much as 20 percent in Europe after a gray market emerged, with shoppers buying the lower euro-priced bag, but reselling it in the country where the stronger currency made the bag more expensive.
In June, Levi Strauss & Co. raised prices in Europe on its jeans. Ralph Lauren, during its most recent earnings announcement, said it was raising prices in the mid- to high-single-digit range in countries that have been impacted by currency devaluations.
Even companies without a big global footprint, such as Neiman Marcus or Bloomingdale’s, are being hurt by the strong dollar because overseas tourists in major cities just aren’t buying like they used to. And companies not based in the U.S. are seeing their earnings impacted by “currency headwinds,” although that catchphrase is being used to describe a variety of scenarios. The divergence between the dollar and the euro currencies has played out in different ways for different companies.
H&M, for example, source their products in Asia, where currencies are pegged to the U.S. dollar, but then price them in a weaker euro. And Neiman Marcus said in its S-1 filing for a possible initial public offering that a substantial portion of its inventory comes from foreign suppliers who price their merchandise in a different currency.
Global American firms that had been enjoying increased sales from overseas are finding those sales are not translating to their advantage. Levi’s said its revenue would have risen 1 percent, but currency issues hurt earnings as revenue fell 6 percent. In Europe, net sales for Levi’s grew 9 percent for the most recent quarter, but currency differences weighed down revenues by $46 million.
Most companies place hedge trades in an attempt to soften these volatile swings in currency valuations. Unfortunately, these trades can go badly. “More than half of the decrease at Gucci in terms of basis points is driven by the combination of currency fluctuations and hedging,” said Jean-Marc Duplaix, chief financial officer at Kering, during the company’s most recent earnings conference call.
“Currencies are always a difficult thing to predict,” said Jean-Jacques Guiony of LVMH Moët Hennessy Louis Vuitton during the company’s latest earnings conference call. LVMH had its fair share of currency hedging problems even as it benefited from a positive currency exchange.
LVMH noted in its statement of first-half 2015 earnings that a net expense of 207 million euros, or $225 million at the current exchange rate, was taken during the first six months of the year.
This was much higher than the 67 million euros, or $72 million, expense taken in the first six months of 2014.
If it wasn’t pricing or hedging issues, apparel companies found that their European distributors were the ones affected. Deckers, maker of Uggs, said the strong dollar caused its international distributors to order fewer units when their buying power was cut.
Another side effect of the strong dollar/weak euro is the noticeable shift in tourist spending patterns. The Chinese yuan is pegged to the dollar and strengthened with it. As the Chinese government has cracked down on luxury shopping at home, the Chinese shifted to Europe for their spending with increased buying power. Japan also saw its tourism traffic increase as the Chinese took advantage of the Japanese yen being weaker than the yuan.
German fashion house Hugo Boss said in its earnings statement for the first half of the year that “our business with Chinese travelers in Europe increased by more than 50 percent in the first six months, including a doubling of sales in Italy. Chinese customers have now become the most important foreign consumer group in our European business, overtaking visitors from Russia.”
Kering also highlighted the shift, saying in its earnings release, “The currency divergence has greatly affected tourism. Gucci sales in the U.S. were more locals and less tourists. The Chinese and American tourists are spending more in Europe, due to the stronger dollar.”
Ralph Lauren also discussed the tourist shift during its earnings call. “We saw significant increases in traffic in Europe and Japan and a decline in the U.S. Our business was up double digits in Europe where the currency is weak.” Robert Madore, Ralph Lauren’s chief financial officer, said, “The negative FX impact to revenue growth was approximately 500 basis points.”
No matter what the currency issues were, the pain was felt all the same. Gildan Sportswear said in its recent quarter that across its international markets, the company had a negative impact of $10 million. Currency negatively impacted Avon’s quarterly earnings by 0.17 percent or 15 cents a share. Neiman Marcus in its S-1 filing said its net earnings for the quarter ending May 2 were $19.8 million, but the company booked a currency loss of $15.7 million, cutting total earnings to just $4.9 million.
Even though it sounds as if currency has been a problem for everyone, L’Oréal looks to be on the winning side of the equation, saying in its earnings statement, “After taking into account a very positive currency impact of plus-9.7 percent, reported sales growth came out at plus 14.7 percent.” The weak euro has given the company an advantage as they enjoy sales from the higher-valued dollar regions.
Tod’s said in its earnings call that due to positive currency fluctuations, its sales for the first half of 2015 were up 7.9 percent. Had it not been for the exchange-rate gains and hedging contracts, sales would only have been up 1.8 percent.
LVMH, which struggled with its hedging activities, offset it with a 13 percent positive exchange-rate impact on its sales growth. The company stated in its earnings report that, “This year — because of the hedging that we’ve taken last year — this year, most of the effect is on the conversion effect, which means the translation into euros of the sales and profit of our subsidiaries across the world, and this is how we achieved the plus 14.5 percent growth of sales and profit.”
Looking ahead, many fashion and beauty companies feel that the currency issues will moderate toward the back half of the year. Most are saying the price increases taken now will begin to flow through to the top line even if the euro continues to weaken.
In addition, price increases in Europe could turn off currency-chasing shoppers looking for a bargain, in effect evening out the international businesses — which was Chanel’s goal in raising prices. However, if the U.S. raises interest rates before the end of 2015, causing the dollar to become even stronger, the euro could fall even further. In that case, the current price increases may not be enough and fashion companies, not the consumer, may end up being the currency-chasers.