With the greenback hitting its highest level in 11 years against major currencies earlier this month, footwear players are anxious about the potential fallout. While currency values are in constant flux, analysts say they expect the U.S. dollar’s historic high — particularly against the euro — to affect companies that export abroad by lowering foreign demand for U.S. products. (At press time last week, the euro traded at $1.0661.)
Jeff Van Sinderen, an analyst at Los Angeles-based B. Riley & Co., said he expects “almost any company with substantial international business” to be hurt by the dollar’s strength.
In a conference call last month, Robert Shearer, CFO and SVP of VF Corp., the company behind Timberland and Vans, said Europe is the most important market for VF’s international operations, making the situation worrisome.
Shearer explained that a 5-cent move in the euro on a full-year basis would impact revenues by about $125 million, or 5 cents per share.
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Christopher Svezia, an analyst at Susquehanna Financial Group, said that while currency woes pose a significant threat to profits, that pressure is simply a function of doing business on an international playing field and that “all is not lost.”
“The currency-neutral or underlying demand for brands like North Face, Vans, Timberland and Nike should remain strong,” said Svezia.
Still, recent earnings reports show that the dollar’s rise is having an impact. Genesco Inc., whose fourth-quarter earnings were up from the year-ago quarter but missed Wall Street expectations, said its tough quarter was due in part to currency trends.
“Gross margin pressure, lower-than-planned contributions from new stores and acquisitions in the Lids Sports Group and unfavorable trends in foreign exchange rates resulted in disappointing earnings,” said Genesco CEO Robert Dennis.
Nike also felt the effect of currency shifts in last week’s fourth-quarter earnings report, but analysts said the long-term outlook for the athletic giant is solid.
“Nike is good at dampening FX market volatility,” said Morningstar analyst Paul Swinand. “They’re so global that they can shift things around.”
CL King & Associates analyst Steven Marotta said pricing strategies are the only way companies can attempt to address FX pressures.
“Companies can either raise prices, keep prices stable and absorb the loss, or do a combination of both,” said Marotta.
Morningstar’s Swinand shared similar sentiments but noted that while pricing adjustments can help, the higher the dollar climbs, the more challenging it will be to counter that with pricing. “If the dollar moves minimally — 10 percent, for example — you can partially offset it with pricing, but at higher percentages, it gets more difficult,” he said.
Van Sinderen said he expects companies to strategize ways to reduce their margins and make prices more palatable for consumers.
“You can’t take a sneaker that was selling for 60 euros and [suddenly] put it on the shelf for 75 euros,” said Van Sinderen. “So wholesalers and retailers have to work together to absorb the losses.”
Hedging, where companies make investments to reduce negative impacts from adverse price movements, is another strategy, but analysts said it can only help to a degree.
“[A business] would have to have hedged enormously to offset the kind of currency movements we’re seeing,” said Van Sinderen.
Foot Locker Inc., which reported its highest annual sales and profits on March 6, was able to minimize the effect of the stronger dollar in Q4 via a one-time financial hedge the company had in place.
Foot Locker CFO and EVP Lauren Peters said in the March 6 conference call that the net impact of FX on the retailer’s earnings in Q4 was about 2 cents a share, but the effect on the bottom line would have been 3 cents a share were it not for the hedge.
Although Foot Locker benefited from that move, Peters told FN at the company’s investor relations meeting last week that the retailer has no plans to hedge aggressively.
“Largely, we buy the product in the currency we sell it in,” she said. “We do look for hedging opportunities, but we sell sneakers — we’re not speculating on currency.”
Overall, analysts emphasized that companies should stay focused on their operations.
“There’s going to be a hit to earnings [due to] currency headwinds, but that doesn’t say much about the overall strength of a business,” Van Sinderen said.
