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.
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