16 June 2019

Strong Dollar Hangs Over More Companies

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The stronger dollar is suppressing sales and profits at America’s big companies, prompting them to put renewed emphasis on cost cutting and adding pressure on the broader U.S. economy. The currency effects are hitting a wide swath of companies that had expanded aggressively overseas in search of growth and hurting stocks and rattling investors. 

Consumer-products giant Procter & Gamble Co. was hammered as currencies in its markets around the world weakened against the dollar, pushing its profit down 31% and its sales down 4%. The company said currencies could reduce its profits by $1.4 billion this year, a hit it will try to offset with a cost cutting program that includes layoffs and cuts to its huge marketing budget.

Expectations for the quarter, already low among investors and analysts, have worsened as the results have rolled in. Analysts now expect companies in the S&P 500 index to post a scant 0.5% in sales growth, with per-share profit gains of 3.3%, according to financial data firm Thomson Reuters. The figures reflect actual results for 119 companies and analysts’ estimates for the rest of the index’s members. As recently as Jan. 1, analysts were expecting sales growth of 1.3% and earnings growth of about 4.2%.

The bad news on the earnings front comes as economists are grappling with mixed signals about the health of the U.S. economy. While broad data on economic growth and jobs creation were strong going into the end of the year, more recent data has been less certain.

Demand for big-ticket manufactured goods tumbled by 3.4% last month, the Commerce Department reported Tuesday, a sign U.S. businesses remain cautious about spending despite the economy’s recent momentum. Factories are getting a boost from higher demand for cars and other consumer items, but orders for nondefense capital goods excluding aircraft—a proxy for business spending on equipment and software—dropped 0.6% from November.

The strong dollar can hurt U.S. companies in a variety of ways. The most typical is the so-called translation effect: Companies’ sales in overseas markets may keep growing in local terms, but they look smaller when converted back into stronger dollars. It also can lead to big mismatches between costs and revenues and make it harder for export oriented companies to compete.

P&G fell victim to a number of those impacts. The company, for instance, is heavily exposed to Russia, where it sells razors and blades that are made at its Gillette plant in Germany. The slumping ruble means it has to jack up prices in Russia to cover the spread, but prices aren’t increasing fast enough to cover the difference. Meanwhile, the Russian unit’s bills for those razors get bigger while they are in transit, which will force the company to make adjustments to its balance sheet, Chief Financial Officer Jon Moeller told analysts Tuesday.

P&G said currencies will reduce its sales by 5% in the year that ends in June and its profit by 12%. The impact is largely concentrated in six countries: Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland. The decline in the Russian ruble alone is projected to account for a $550 million hit to the company’s annual profit.

The blow from currency is an outgrowth of P&G’s successful expansion into overseas markets over the years. The company sells more than $8.8 billion in products in those six troubled countries.

To offset the impact, the maker of Gillette razors and Pampers diapers is relying on cost cuts, including reduced headcount and cutbacks in spending on marketing. That will involve shifting more of advertising to digital channels, which already account for more than 30% of the total.

One area where it has more control is with job cuts. P&G’s long running plan to slim down called for reducing non-manufacturing jobs between 16% and 22%. Through the end of January, the company was at 18%. Mr. Moeller said cuts will likely be closer to the top of that range by the end of this fiscal year in June.

Other companies are feeling the effects as well. DuPont Co. gave a disappointing outlook for 2015, warning its profit would take a significant hit from the strengthening U.S. dollar and weakness in its agricultural-seed business. The company said it would reach its goal to cut $1 billion in costs well ahead schedule.

Click here to access the full article on The Wall Street Journal. 

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