The value of the U.S. dollar has strengthened considerably through 2015. The dollar's upward rise is projected to continue, with some experts forecasting parity between the dollar and euro before the year's end. While that may sound like a good thing, a strong dollar doesn't necessarily benefit the U.S. economy. In fact, many industries are facing serious head winds due to the strong greenback, and many large corporations have cited a strong dollar as a reason for poor earnings in recent quarters. Many corporations in the retail sector, in particular, have blamed the strong dollar for poor results. There are two big reasons a strong dollar is hurting certain retailers.
Earnings of Multi-National Retailers
Multi-national chains, such as Wal-Mart Inc. (WMT) and KFC parent company Yum! Brands Inc. (YUM), have relied on international sales to boost growth over the years. After these chains saturated most U.S. markets, they opened new locations abroad to keep growing. Now, due to the strong dollar, that decision is coming back to haunt them.
Multi-national chains earn sales all over the globe, yet they account for those sales in the United States. When the dollar is strong, retailers with many overseas locations will suffer a large foreign exchange hit. How much of a difference can this currency impact make? Wal-Mart's first quarter results were impacted dramatically—a full four cents were shaved off earnings, and sales growth slid from a 4.5% gain to a 0.6% loss on currency effects alone. The dollar single handedly hurt Wal-Mart's quarter and it will continue to impact Wal-Mart's year; even retailers who are only modestly impacted will also, likely, use the strong dollar scapegoat for poor earnings throughout 2015. (Related: What do the terms weak dollar and strong dollar mean?)
Tourism
The biggest impact that the strong dollar is having on retail is via tourism. Upscale retailers rely on tourists to shop in their U.S.-based stores; the strong dollar has made vacationing in the United States too pricey for many international tourists, which is killing the bottom line of specialty retailers.
Take Tiffany & Co. (TIF), as an example. The jeweler has said that "nearly one-quarter of its U.S. sales and more than 40% of sales at its flagship Fifth Avenue store in Manhattan come from foreign tourists." That single landmark store, which is a huge tourist attraction, generates $1 of revenue for every $12 Tiffany earns. The strong dollar has meant fewer tourists, which has led to weaker revenues and earnings for Tiffany this year.
Tiffany, in particular, is hit with both impacts of the strong dollar; it's a multi-national chain and it relies on tourists to visit its U.S. stores. This is the case for many luxury retailers like Coach, Michael Kors and Ralph Lauren. A general rule of thumb is that retailers who are more "U.S. based," meaning they have little or no international operations and do not rely on international tourists for U.S. sales, are less vulnerable to a strong dollar. (Related: Best Places To Go On A Strong Dollar In 2015.)
The Bottom Line
While a strong U.S. dollar can hurt certain U.S. retailers, it is important to remember that its impacts are often short lived. Currency values fluctuate constantly, and an otherwise strong retailer can have a few bad quarters just because of them. Retail investors must determine if a retailers poor performance is actually due to the strong dollar, or if an executive team is simply blaming the dollar for their own shortcomings.
Before considering a multi-national retail stock, consider whether or not the retailer is still in good financial condition and whether or not performance (sales, same-store sales and earnings) is strong when the impact of currency is excluded. In some cases, when an otherwise strong retailer's stock is punished solely on the impact of currency, a buying opportunity may exist. The key for retail stock investors is to have a long-term outlook; you must be willing to ride out currency related gyrations over the long-haul.
