By Theo Francis
The stronger dollar is often presented as an optical problem for
U.S. companies--it makes their overseas sales look smaller. But it
can do a lot of real damage, too.
Customers can disappear, competitors can get tougher and
earnings can shrink--and it can be tough to adjust quickly.
Together, they add up to a fast-evolving problem for corporate
profits and U.S. growth.
Avon Products Inc., which books 88% of its sales outside the
U.S., can't raise prices on its makeup and wrinkle creams fast
enough to offset the dollar's rise against the Brazilian real and
other currencies. The suddenly stiffer price of a U.S. holiday
means fewer foreign travelers booking hotels through Expedia Inc.'s
travel websites. European rivals to consumer-products makers like
Procter & Gamble Co. now have an advantage in price wars for
market share in the U.S. And utilities and steelmakers in Europe
and Asia may buy less U.S. coal to fire their furnaces.
Myron Ullman, chief executive of J.C. Penney Co. and until last
month chairman of the Federal Reserve Bank of Dallas, said in an
interview a threat to U.S. growth, with consumers recovering, is a
hit to exports as the strong dollar ratchets up the cost of
American products and services overseas.
The effects are likely to become clearer as multinational
companies report their end-of-year earnings over the coming weeks,
and they could be significant. Johnson & Johnson said Tuesday
that if exchange rates hold, the damage to its earnings would be
two or three times what the company had projected in October.
Multinationals have spent decades shifting production closer to
major markets, in part to avoid significant problems from currency
fluctuations and leaving the U.S. less dependent on exports than
any developed economy. Those efforts are imperfect, however, and
the dollar's current rise comes as many companies are already
wrestling with sluggish sales said Steven Winoker, an analyst at
Sanford C. Bernstein & Co.
"If this were affecting 7% or 9% growth, we would not be so
concerned," said Mr. Winoker, who estimates currency issues will
reduce revenue growth for industrial and electrical equipment
companies by 2.6 percentage points or more in 2015. "But with most
companies at low/mid-single-digit underlying growth rates, this
headwind becomes material."
For door-to-door beauty company Avon, the dollar is adding
unwanted pressure on CEO Sheri McCoy's turnaround efforts. She has
resolved an attention-draining foreign bribery probe and improved
performance in some markets, but currencies have weighed heavily on
the company's results and are likely to remain a problem.
Avon generates about a fifth of its sales in Brazil and
significant amounts of the rest in countries like Russia,
Argentina, Poland and South Africa. As a result of the stronger
dollar, the company's sales fell 8% in the third quarter. They were
up 1% excluding currency effects.
The company's ability to adjust prices when local currencies
fall is governed in part by the time it takes to print brochures.
Avon also buys raw materials for sales in Europe, the Middle East
and Africa using euros, dollars and other hard currencies,
executives said. Local competitors that don't face those same
pressures might be able to undercut any price increases Avon
enacts, acting Chief Financial Officer Robert Loughran has
said.
A company spokeswoman declined to comment ahead of Avon's
fourth-quarter earnings report, scheduled for Feb. 12.
Salesforce.com Inc.'s revenue has been growing quickly--up 29%
for the three months ended Oct. 31--as the business-software
company expands overseas, including a major effort in Europe.
Although more than a quarter of sales are outside the U.S., the
company's research and development is at home, paid for in dollars,
executives said earlier this month. Salesforce has held off raising
prices overseas to avoid alienating customers. Currency shifts are
likely to reduce revenue by $125 million to $150 million in the
year ahead, the company said last fall.
"Our revenue is much more exposed than our expenses are
internationally, " Andrew Baer, a Salesforce senior vice president,
told analysts on a conference call. "That will have a little bit of
pressure."
A spokesman declined to comment.
Sometimes, the cost-revenue mismatch can work in U.S. companies'
favor. Aluminum giant Alcoa Inc. mines the raw material bauxite in
countries like Australia, Brazil, Suriname and Jamaica, and for the
most part refines the ore into alumina at facilities near the
mines. As currencies depreciate, Alcoa's local production costs
fall.
Meantime, the company sells just over half its goods in the U.S.
for dollars, based on 2013 figures. The result: Currency
contributed $37 million to its $159 million in fourth-quarter
earnings.
Not all minerals companies are that lucky. The strong dollar has
made U.S. coal more expensive overseas, which means fewer shipments
to European and Asian utilities and steelmakers there, said Fredrik
Eliasson, chief financial officer of railway company CSX Corp. "If
the U.S. dollar was weaker, we would most likely be shipping more
export coal," he said. Mr. Eliasson said he expected shipments of
coal for export to drop to 30 million tons from almost 40 million
in 2014.
For tourist-dependent companies, the strong dollar chokes off
business in much the same way that it does for U.S. companies
seeking to export their goods.
Hotels in U.S. tourist destinations like New York have expressed
worry about declining demand over the past few months, as the cost
of an American vacation slides out of reach for many middle-class
travelers from Europe and South America, said Dara Khosrowshahi,
chief executive of Expedia. That is particularly disruptive because
Brazilians and travelers from some other countries tend to spend
more than domestic tourists and are generally less likely to cancel
stays once they are booked, he said.
The dearth of foreign tourists is also weighing on Tiffany &
Co., which gets 8% of its global sales from its flagship New York
store that is popular with tourists. Shares dropped sharply last
week after it warned fewer tourists and a stronger dollar
contributed to disappointing holiday sales and would continue to
pressure sales in the year ahead.
"When the dollar was weak, we saw loads of Europeans coming here
to shop, " said Mark Aaron, vice president of investor relations,
adding that the company's expanding store base outside the U.S. is
making it easier to weather downturns in tourism. "This is what
happens when you're a global business."
U.S. companies also face the risk that foreign competitors will
try to undercut them here, taking advantage of relatively cheaper
production costs and the bigger bang for the buck from U.S. dollar
sales to become more competitive on price or bump up their
marketing spending.
"When the dollar gets stronger, they actually have more
ammunition to go against you in your home turf," said Ali Dibadj, a
consumer-sector analyst at Bernstein, drawing in part on
proprietary data he said he has seen. "In the trenches, your
non-U.S. competitors spend more back against you in the U.S."
Vipal Monga and Drew FitzGerald contributed to this article.
Write to Theo Francis at theo.francis@wsj.com
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