The Dollar Ate Our Profit Is Lament of Delta, Mattel, Whirlpool

  • Greenback up 17 percent in third quarter from a year earlier
  • Companies link earnings, sales shortfalls to currency swings

U.S. companies that blamed billions of dollars of lost revenue in the first half of the year on the greenback’s meteoric rise are signaling that the trend isn’t getting any better.

Delta Air Lines Inc. said this month that losses on revenue denominated in yen cost the company $55 million. Toymaker Mattel Inc. said foreign-exchange headwinds were the primary cause of its weak third-quarter earnings. And Whirlpool Corp. said Oct. 23 that the stronger dollar will reduce 2015 revenue by more than $2.5 billion. Two out of three companies in the Standard & Poor’s 500 Index that reported earnings through Oct. 22 mentioned the strong dollar or currency-related woes in conference calls with analysts and investors.

The greenback was about 17 percent stronger in the third quarter compared with the same period a year earlier, the biggest increase in more than a decade and leading to higher, less-competitive prices for U.S. businesses seeking to sell their products overseas. Companies also take a hit when they account for revenue denominated in weaker overseas currencies, unless they hedged their exposure.

North American firms lost about $46 billion to foreign-exchange headwinds in the first half of the year, according to a September report from FiREapps, a Scottsdale, Arizona-based company that advises businesses and makes software to help reduce the effect of currency swings. Chief Executive Officer Wolfgang Koester said he expects third-quarter results to largely reflect the trends during the first half.

"The dollar is an easy crutch," said Scott Wren, a senior global equity strategist in St. Louis at Wells Fargo Investment Institute. "We haven’t had a great earnings season and we probably won’t. Operating earnings are probably going to remain flat -- or down a little or up a little -- so you look for those scapegoats."

Dollar Strength

More than half of the 173 companies in the S&P 500 Index that have reported results for the quarter have trailed analysts’ sales expectations.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, averaged 1,204.89 in the third quarter, compared with 1,027.71 a year earlier. The gauge slipped 0.3 percent at 5 p.m. New York time. An analysis from the Federal Reserve this year indicated that when the dollar appreciates by 10 percent, profits earned by U.S. companies’ foreign subsidiaries decrease by 4 percent.

During the third quarter, the dollar was 17 percent stronger versus Japan’s currency compared with the same period a year ago. The move, combined with fuel surcharges, hurt revenue in Delta Air Lines’ Pacific unit, which fell 12.7 percent. 

Currency Drag

Atlanta-based Delta, which has been plagued by weak overseas demand and the rise of U.S. discount airlines, posted third-quarter earnings excluding some items of $1.74 a share, surpassing the $1.72 average of 15 estimates compiled by Bloomberg. A Delta spokesman declined to comment beyond the earnings release.

"The currency issue is an important issue for every consumer company in the U.S. that sells overseas," Delta CEO Richard Anderson said in an interview with Bloomberg Television on Oct. 14.

At Mattel, international sales, which make up almost half of its revenue, plunged 19 percent from the same quarter a year ago with the biggest decline coming from Latin America, where sales fell 29 percent. El Segundo, California-based Mattel’s third quarter profit of 71 cents a share, excluding some items, trailed analysts’ estimates of 79 cents. Representatives from Mattel didn’t respond to requests for comment.

Dollar strength against emerging-market peers was more pronounced than gains versus developed-nation counterparts. An index of 20 EM currencies was down 19 percent in the third quarter compared with a year earlier, including a 55 percent drop for Brazil’s real.

Benton Harbor, Michigan-based Whirlpool’s shares fell as much as 12 percent Oct. 23 after company executives said they expect the dollar’s strength against currencies including the real, euro and Russian ruble to reduce 2015 revenue by more than $2.5 billion.

“Currencies have experienced a global reset and we are prepared to operate this change in environment,” CEO Jeff Fettig said on the company’s Oct. 23 earnings call.

Added Burden

"The foreign exchange sort of added insult to injury" for many U.S. companies, said Jaime Katz, an analyst at Morningstar Inc. "For places like Brazil, where the currency has been extremely volatile, whenever you translate those revenues into dollars, you’re going to wind up with a big disparity between what you’re earning in local currency and what you’re earning in reporting currency."

Firms often do take steps to stem currency losses. Most S&P 500 companies with a large percentage of international sales will hedge against exposure to volatile currencies, said Wells Fargo’s Wren. 

Even in a quarter that saw an ongoing rout in commodity prices and slowing growth in China hurt global demand, 75 percent of S&P 500 companies that have reported earnings for the third quarter have topped analysts’ estimates.

Oak Brook, Illinois-based McDonald’s Corp., the world’s largest restaurant chain, gets about 70 percent of its revenue from operations outside the U.S. It reported net income in the quarter of $1.40 a share, beating the average analyst estimate of $1.27, even as “currency translation” reduced profit by 17 cents a share.

Earnings were reduced by the dollar’s strength against the euro, Australian dollar and ruble, said Becca Hary, a spokeswoman for McDonald’s.

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