The escalating strength of the U.S. dollar has proven to be a boon for many U.S. businesses, but for others with large overseas markets, it has served as a drag. Here are three companies that have been socked by the strengthening dollar.
1. Wal-Mart Stores, Inc. (WMT)
According to the company's fourth quarter and full year earnings report released on Feb. 18, full year total revenues for the company were $482.1 billion and diluted earnings per share (EPS) from continuing operations were $4.57 representing a 0.7% and 9.5% respective decline over the same periods last year.
But on a constant currency basis, total revenues for the retailer were $499.4 billion, an increase of 2.8%, and adjusted EPS was $4.59. Thus, as a direct impact of the strong dollar, foreign exchange rates impacted full year revenue by 3.5% and operating income by 2.8%. Walmart's 2016 fiscal year international revenues represented 20.5% of the company's total revenues. (For more, see: Is Walmart a Bargain Right Now?)
The strong dollar hammers companies such as Walmart because some of its products and input costs are sourced in U.S. dollars. As this dollar strengthens and the company maintains or increases it prices, overseas customers using weaker currencies have less purchasing power and thus consume less from the big box retailer. The impact also occurs in the exchange back from the local currency revenues to the domestic currency. Subsequently, the results of the company take a hit.
Walmart's stock is currently trading at $64.67, 23.8% down from its 52-week high.
2. International Business Machines Corp. (IBM)
Big Blue reported full year and fourth quarter results in January of this year and the creator of the cognitive intelligence known as Watson reported fourth quarter revenues of $22.1 billion and diluted earnings per share of $4.59, a decrease of 9% and 17% respectively. When accounting for currency exchange though (i.e. the strong dollar), revenues were only down 2%. For the full year, revenues were down 12% to $81.7 billion and diluted EPS was down 13% to $13.60. Adjusting for currency, full year revenues were down 1%.
In the full year and fourth quarter earnings conference call delivered on January 19, CFO Martin Schroeter talked about the impacts of currency translation on IBM's performance:
"For the year, currency translation reduced our revenue by over $7 billion. That by itself is the revenue of a Fortune 500 company and currency was also a headwind to our profit performance. We estimate it impacted our profit growth by about $300 million in the fourth quarter and over a billion dollars for the year. At current spot rates, we would expect a significant impact to revenue and profit again in 2016 not just from the translation, but from the year-to-year cash flow hedging dynamics." - IBM CFO Martin Schroeter, 2015 IBM Fourth Quarter and Full Year Earnings Conference Call
IBM's stock is currently trading at $133.08, a decrease of 24.5% from its 52-week high.
3. Coca-Cola Co. (KO)
The company is known as a favorite of Warren Buffett's for its competitive moat, reported revenues of $44.29 billion in its fourth quarter and full year earnings report released on February 8. Of these revenues, 38.2% were represented by its international geographic segments—Eurasia and Africa, Europe, Latin America and the Asia Pacific. These segments all realized declines in revenue for the full year. Additionally for the full year, overall reported net revenue declined by 4% and diluted earnings per share increased by 5% to $1.67.
The fourth quarter and full year earnings report also details the headwinds that the company experienced due to foreign currency exchange rates: comparable operating income was impacted by 13 points, and both income before taxes and EPS were impacted by 10 points for the fourth quarter.The earnings report goes on to detail that full-year comparable operating income was impacted by 11 points, and comparable income before taxes and EPS were both impacted by 8 points.
Additionally, it is indicated in the report that net revenues and income before taxes will experience a 5 point and 12 point currency exchange headwind respectively in 2016.
Again, as in the case of Walmart companies such as Coca-Cola are impacted in two manners when it comes to a strong dollar: any inputs denominated in dollars hold their costs in dollars and are subsequently priced at this level and secondly, as revenues are exchanged back weaker currencies do not return as much. (For more, see: Comparing Coca-Cola and Pepsi's Business Models.)
KO stock is currently trading at $43.77, close to its 52-week high.
The Bottom Line
The strengthening dollar can be a boon for many businesses as it provides the consumer with higher levels of purchasing power to buy more coffee from Starbucks for example but it can also serve as a catalyst of deceleration for others. The businesses impacted the most are those with large overseas exposure who source inputs in dollars and also who subsequently lose on the exchange coming back due to weaker currencies. These companies are furthermore faced with global economies that are reeling from slow growth in China and its daisy chain impacts to other, weaker international economies. Until these markets reach more solid footing, companies such as Walmart, IBM, and Coca-Cola will feel the blunt impact.
