By Theo Francis and Serena Ng
The strong dollar is a given. The question now is whether
American companies can raise prices enough to offset the damage
without hurting sales.
So far, the answer isn't good.
Consumer-goods giant Procter & Gamble Co. said Thursday that
price increases to offset currency issues in developing countries
had contributed to a 2% drop in sales volume in the quarter ended
in March.
Mead Johnson Nutrition Co., maker of Enfamil formula, said
declines in Latin American currencies outpaced the company's price
increases, contributing to a 2% drop in overall sales from a year
ago.
For McDonald's Corp., a 2% price increase in both the U.S. and
in Europe outside Russia wasn't enough to keep the dollar's rise
from cutting revenue by $700 million and earnings by 9 cents a
share in the first quarter. Executives forecast more pain from the
currency fluctuations for the rest of the year.
"It's hard to get ahead of a very strong dollar," Greg Hayes,
chief executive of industrial conglomerate United Technologies
Corp., said in an interview this week.
The stronger dollar reduces the value of sales earned in foreign
currencies such as the euro or the Brazilian real when those
revenues are converted back into dollars. That dynamic has stung a
range of companies--from General Motors Co. and General Electric
Co. to Facebook Inc. and PepsiCo Inc. Since the beginning of the
year, the euro has dropped more than 10% against the dollar, while
the pound has fallen more than 3%, following sharp declines late
last year.
P&G said sales in the first three months were down 8% from a
year earlier. If it hadn't been for currency issues, they would
have been flat. At Coca-Cola Co., a 7% rise in sales shrank to a 1%
gain after the impact of the stronger dollar was accounted for. 3M
Co. lowered its earnings forecast for the year after a stronger
dollar reduced first-quarter sales by 6.5%, leaving them down 3.2%
overall.
The dollar's impact comes amid improving earnings and sales for
big companies that aren't in the oil-and-gas business. With about a
third of the S&P 500 reporting results, earnings are forecast
to rise 6.9% excluding energy companies, according to Thomson
Reuters. Revenues, meanwhile, are forecast to rise 2.5% on that
basis.
For some companies, currency effects meant the difference
between sales growing and shrinking: 5% growth became a 4% decline
at Kimberly-Clark Corp., thanks to currency. At United
Technologies, 3% sales growth became a 1% decline. And Mead Johnson
saw a 3% sales increase become a 2% drop once currency fluctuation
was taken into account.
Tech companies reporting earnings Thursday also cited currency
woes.
Google Inc. said the dollar's strength reduced the quarter's
revenue growth to 12% year-over-year from 17% without currency
effects. Facebook, which generates more than half its revenues
overseas, said the stronger dollar reduced revenue by nearly $200
million, and Microsoft Corp. predicted the strong dollar would
continue to slow its revenue growth.
And other companies also expect currency to remain a significant
drag through the year. Pharmaceutical maker Baxter International
Inc. said second-quarter sales are likely to grow 1% excluding
currency effects--but decline 9% to 10% including them, even
without further strengthening of the dollar. United Technologies
expects foreign-exchange pressure to weigh on its sales and profit
from regions such as Europe for the rest of the year.
Companies have other levers to pull as the dollar value of their
overseas earnings falls. P&G is planning more cost cuts,
including slashing its spending on marketing agencies. The company
has been shifting more of its advertising to digital channels,
which already account for more than 30% of the total, and is now
looking to cull the number of advertising agencies it uses in an
effort to save half a billion dollars.
PepsiCo, meantime, said it is seeking to cut costs as well as to
move more production costs to overseas markets as currency effects
are poised to reduce profit in Europe. The company says it
generally tries to recover 75% of currency effects through price
increases and make up the rest with cost cuts.
"The challenge is to balance volume and revenue," said Pepsi CEO
Indra Nooyi. So far, executives say, demand is largely withstanding
the price changes Pepsi has imposed in some markets, including
Russia. Pepsi warned currency weakness could hit its profit by 11
percentage points this year. Revenue fell 3.2% in the first
quarter, while profit was flat.
The decision to raise prices can be complicated, requiring an
assessment of what customers can bear and what rivals will do.
Laboratory equipment maker Thermo Fisher Scientific Inc. said it
sought to offset currency losses by increasing prices in targeted
markets, including Japan, where it has few domestic competitors
that are insulated from currency effects.
DuPont Co. said price increases for its agricultural products
increased the segment's revenue by 3%, in part to offset weakening
currencies in Europe and Asia. But currency fluctuations
overwhelmed those price increases, contributing to a 10% overall
decline in revenue for the segment.
In a Tuesday earnings call with analysts, CEO Ellen Kullman said
DuPont employees are reanalyzing pricing strategy based on currency
movements, recognizing that it is typically harder to raise prices
when facing off against a local competitor as opposed to other
foreign producers that also deal with currency challenges.
"And each individual product line, each individual president is
driving the appropriate actions for their sector based on
that--where we make versus where the competitors make," Ms. Kullman
said on the call.
Write to Theo Francis at theo.francis@wsj.com and Serena Ng at
serena.ng@wsj.com
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