Not only is it complicated, but it might be a better name for fashion CEOs and finance heads who travel the world in constant motion.
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Count the recent moves that have brought the euro and dollar at par for the first time in 20 years – as another X-factor for the industrial crisis, the risk of recession, inflation, the war in Ukraine and more.
“A lot of it is because of the Fed,” said Eric Lund, chief economist at the Conference Board, referring to the Federal Reserve, which has raised interest rates to cool rates. “Prices in the US are going up, and there are concerns about economic weakness globally and people are fleeing their money to places where they feel safer. And often, that’s in America.
And it’s still unclear how much interest rates will increase to slow the economy, which added 528,000 jobs more than expected last month, eventually regaining ground lost during the first part of the pandemic.
Like anything else, currency fluctuations are something that happens to companies, not something they can control. The big players tend to “hedge” against big moves by making more investments to help offset the change and mitigate some of the impact.
But predicting how the currency landscape will change is an imperfect science.
“It’s a very difficult thing to do,” Lund said.
Companies can overcome some of the issues by using local funds. Elf Beauty CEO Tarang Amin, for example, sees currency as a headwind, but was confident ahead of first-quarter results.
“Because we buy in Chinese renminbi, it hasn’t had as big an impact as other companies,” Amin said in an interview. But we definitely carried those headwinds. They’re embedded in our approach and one of the things I’m proud of is that we can take our EBITDA. [earnings before interest, taxes, depreciation and amortization] Even with those headwinds of 12 to 14 percent, I think it speaks to our overall strength and energy.
Companies can seek to build more GDP by buying and selling in the same currencies.
“We’re seeing more demand for products made ‘locally for local,'” said consultant Brian Ehrig, a partner in Kearney’s consumer practice. “Things made in Europe for Europe, things made for America in or near America, things happening in China.”
But now the global giants have to take their lumps.
VF Corp., the owner of North Face and Supermir, saw nearly $100 million in revenue in its quarter-final on July 2 subject to currency translations. That turned top-line profit of 7 percent before currency into a 3 percent increase to $2.3 billion. Walmart Inc. In the second quarter, the currency was as high as $1 billion, and in the second half it hit another $1.8 billion.
On their own, those financial changes will be hard to take, but they are by no means on their own.
Personal care giant Procter & Gamble’s CFO Andre Schulten told analysts last month: “Year-over-year gross profit is more of a challenge this fiscal year, with foreign exchange rates, freight, materials, fuel, energy and wage inflation.” ’23 than they were in the ’22 budget.
“Foreign exchange rates have moved a lot against us,” Shulton said. “Our current expectation of foreign exchange in fiscal 23 is $900 million after tax. This is a very rapidly increasing headwind…. We expect headwinds to widen further as interest rate differentials widen with the US.
Still, P&G Chairman, President and CEO John Mueller remains confident the company has the necessary tools to navigate choppy waters. I’ll repeat what I said on our April 2020 earnings call: The best response to the uncertainties and challenges we face is to double down on integrated strategies that are delivering the strongest results. It won’t be easy. There will be bumps in the road, but we have portfolio, dominance, productivity and, in my humble opinion, the best organization in the world. We have everything we need.”
But for every currency loser, there is also a currency winner.
For companies headquartered in Europe, the euro is relatively strong.
In the year Reporting its second-quarter 2022 results, Paris-based L’Oréal, the world’s largest beauty company, reported consolidated sales of 18.4 billion euros, up 20.9 percent, with foreign exchange having a “strong positive impact of 7 percent.” He said.
And luxury giant LVMH Moët Hennessy Louis Vuitton’s first-half sales of fashion and leather goods rose 24 percent in constant currency, but its last published result was 31 percent stronger to 18.1 billion euros.
The currency volatility in the market was enough to prompt one analyst to ask LVMH managers on a conference call if there was a gray market in manufacturing.
CFO Jean-Jacques Guiony made it clear that the luxury giant is taking the matter in stride.
“We want to have a little bit of a helicopter view on this,” Gioni said. “FX goes up and down. We’ve seen good times and we’ve seen bad times. You’re right, in some cases too much price variation creates some gray market. It’s not something we see a lot these days. So we’re not particularly worried.”
“The index in the US is a little bit higher than we’ve seen before,” he said. “It creates quite a bit of activity with US customers in Europe, which we haven’t seen in a very long time.
“In general, I mean for the time being, it is not a big issue and does not require urgent measures,” he said. “We’ll see what happens… currencies that create can be reversed and run really fast. So we’re very much looking at it in a wait-and-see manner.