Wal-Mart $680 Million Hit Shows Risk of Not Hedging
Wal-Mart Stores Inc. (WMT) took a $680 million hit to sales last quarter because of the stronger dollar, showing the risks that companies face when they don’t hedge against swings in the greenback.
The world’s largest retailer’s sales excluding membership and other income rose 2.4 percent to $116.2 billion in the quarter ended July 31 and would have gained 2.8 percent to $116.7 billion without currency exchange-rate fluctuations. Wal-Mart, which operates worldwide in local currencies and reports results in U.S. dollars, doesn’t use hedging, spokesman Anthony Rose said via e-mail last week.
Wal-Mart’s strategy, which helped profit during periods of weakness for the dollar, may lead to more losses this year. Analysts estimate that the greenback, which is at its most volatile in more than a year, will continue to climb against other world currencies, hurting companies that generate significant portions of their sales abroad. Wal-Mart said “significant ongoing headwinds” from currencies were part of the reason it cut its profit forecast last week.
“Currency ebbs and flows, and sometimes you’re going to benefit from it,” Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis, said in an interview. “Now that the dollar has strengthened, they’re getting penalized a little bit.”
Some companies have been successful in blunting the effect of currency fluctuations recently. Yahoo! Inc. recorded $165 million in gains in the second quarter from steps the Web portal took to guard against swings in the Japanese yen, bringing its total benefit from such currency hedges to $438 million.
Yet hedging doesn’t always help. 3M Co., the maker of everything from car fuel-system cleaners to dental braces, reported a $152 million loss from foreign-currency forward contracts for the first six months of 2013, according to a filing on Aug. 1. The company said it had a gain of $41 million for foreign currency forward/option contracts.
Wal-Mart said in its earnings statement last week that sales may rise as much as 3 percent in the year ending in January, down from a maximum estimate of 6 percent previously. About a third of the revision is due to currency moves. The Bentonville, Arkansas-based company assumes currency rates will remain where they are, Rose said. Annual profit will be as much as $5.30 a share, less than an earlier estimate of a maximum of $5.40, Wal-Mart said.
Elevated unemployment, higher taxes and rising gas prices that are hurting U.S. consumer demand also contributed to the lower forecast, executives said last week.
The Bloomberg U.S. Dollar Index, which tracks the currency against 10 major peers including the Mexican peso and the Japanese yen, rallied from a four-month low of 1008.61 on June 14 to a three-year high of 1056.33 on July 8. The index averaged about 2.4 percent higher during the three months through July compared with a year earlier.
Analysts surveyed by Bloomberg project 14 of the world’s 16 major currencies will continue to weaken against the dollar in the quarter through December, with only the Brazilian real and the Mexican peso strengthening against the greenback.
Currency volatility surged in June after U.S. Federal Reserve Chairman Ben S. Bernanke said the central bank may reduce its bond-buying program, which tends to devalue the dollar. The 90-day historical volatility of the U.S. dollar has increased to 7.3 percent, the highest since March last year. JPMorgan Chase & Co.’s Global FX Volatility Index reached 11.96 percent on June 24, the most since June 2012, after rising at the fastest pace since the collapse of Lehman Brothers Holdings Inc. in 2008.
“Such dramatic swings are certainly not what corporates want to see,” said Callum Henderson, the global head of currency research at Standard Chartered Plc in Singapore. “It’s very difficult for people to respond quickly in such a rapidly changing environment, and people’s mandate depends on how quickly they can respond.”
The risks may grow as Wal-Mart relies more on sales from abroad, with its international division accounting for 29 percent of its revenue in the year through January, the greatest portion ever. Second-quarter sales in Wal-Mart’s international unit increased 2.9 percent to about $33 billion. Excluding the effect of foreign-currency fluctuations and revenue from acquisitions, sales would have risen 4.4 percent to $33.4 billion.
Currencies didn’t always work against Wal-Mart. Exchange-rate fluctuations added $4 billion to retailer’s sales in the year ended Jan. 31, 2012.
“There’s a lot of time, a lot of thinking and a lot of money that goes into” hedging, said Yarbrough, who recommends buying Wal-Mart shares. “Maybe they just feel by the end of the day that it smoothes itself out over time.”