Multitasking in chief?
That might be a better name for fashion’s CEO and CFOs, navigating a world that’s not only complicated, but constantly on the move.
Consider the latest twist — currency changes that have put the euro and dollar on an equal footing for the first time in 20 years — as another X factor for an industry already grappling with a pandemic, the threat of recession, inflation , the war in Ukraine and more.
“A lot of this is down to the Federal Reserve,” said Erik Lundh, chief economist at The Conference Board, referring to the Federal Reserve raising interest rates to cool an overheated economy. “Rates in the US are going up and there are concerns about the global economic weakness, so a lot of money is going to places where people feel safer putting their money. And many times, that is in the United States itself.”
And it remains unclear how much interest rates will have to rise to cool down the economy, which added 528,000 more jobs than expected last month, and finally regained jobs lost during the early part of the pandemic.
Like so many other things, currency fluctuations are something that happens to businesses, not something they can control. Great players “protect” themselves against big moves by making multiple investments that will help offset changes and soften some of the impact.
But predicting how the monetary landscape will change is an imperfect science.
“It’s a very difficult thing to do,” Lundh said.
Companies can circumvent the problem by using local currencies. Tarang Amin, CEO of Elf Beauty, for example, sees the coin as a headwind, but he showed an air of confidence when reviewing first-quarter results.
“Because we buy in renminbi in China, it hasn’t had as big of an impact as other companies,” Amin said in an interview. “But we certainly have those headwinds. They are embedded in our perspective and it is one of the things that I am proud of, that we can assume our EBITDA [earnings before interest, taxes, depreciation and amortization] 12 to 14 percent guidance even with those headwinds, which I think speaks to the overall strength and momentum that we have.”
Companies can also look to build more local production, buying and selling in the same currencies.
“We absolutely see more interest in products made ‘local for local,'” said consultant Brian Ehrig, a partner in Kearney’s consumer practice. “Things made in Europe for Europe, things made in or near the US for America, in China that’s already happening.”
But for now, the global giants will just have to shoulder their bags.
VF Corp., owner of The North Face and Supreme, saw its nearly $100 million worth of revenue for the quarter ending July 2 vanish in currency conversions. That turned what would have been a 7 percent gain on the top line before the coin into a rise of just 3 percent, to $2.3 billion. Walmart Inc. tagged the coin as a $1 billion headwind in the second quarter, with another $1.8 billion hit seen in the second half.
On their own, those currency changes would be hard enough to accept, but they are by no means alone.
Andre Schulten, chief financial officer of personal care giant Procter & Gamble, told analysts last month: “Combined year-over-year earnings headwinds from foreign exchange rates, freight costs, materials, fuel , energy and wage inflation are an even bigger challenge in fiscal terms. ’23 than they were in fiscal year ’22.
“Foreign exchange rates have moved sharply against us,” Schulten said. “We now expect the exchange rate to be a $900 million after-tax headwind in FY23. That is the fastest growing headwind… Interest rate differentials continue to widen versus the US.” So we anticipate that the headwind could expand further.”
Still, Jon Moeller, P&G chairman and CEO, remains confident that the company has the tools to navigate rough waters. “I will 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 the integrated set of strategies that are delivering very strong results. It will not be easy. There will be bumps in the road, but we have the portfolio, the superiority, the productivity and, in my not-so-humble opinion, the best organization in the world. We have everything we need.”
But for every forex loser, there is also a forex winner.
For companies based in Europe, the euro is relatively strong.
Reporting its results for the second quarter of 2022, Paris-based L’Oréal, the world’s largest beauty company, said that consolidated sales amounted to 18.4 billion euros, an increase of 20.9 percent on the reported basis, and the exchange rate had a “strong positive impact of 7 percent.” .”
And luxury giant LVMH Moët Hennessy Louis Vuitton posted a 24% rise in sales of fashion and leather goods in the first half at constant exchange rates, while the bottom line posted was a more robust 31% rise to the 18,100 million euros.
The currency swings in the market were big enough to prompt one analyst to ask LVMH executives on a conference call if some sort of gray market would ensue.
Chief Financial Officer Jean-Jacques Guiony has made it clear that the luxury giant is taking the matter in stride.
“We tend to have a kind of helicopter view on this,” Guiony said. “FX goes up and down. We’ve seen good times, we’ve seen bad times. You are correct that in some cases excessive price differences would create a gray market. It’s not something we see much of these days. So we’re not particularly worried.
“The rate in the US is a little bit higher than what we’ve seen in the past,” he said. “It generates a little bit of activity with American customers in Europe, which is something we haven’t seen in a long time.
“Overall, I want to say that at the moment, it’s not a big deal and it doesn’t require urgent action,” he said. “We’ll see what happens… what coins think coins can undo and do pretty quickly. So we tend to look at it with a wait-and-see attitude.”
Source: wwd.com