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Dollar is the demon this earnings season


MARKETWATCH 1:52 PM ET 4/23/2015

Symbol Last Price Change
GM 35.835down -1.325 (-3.57%)
PG 81.24down -1.1871 (-1.44%)
MMM 161.17down -3.5 (-2.13%)
UA 83.829up +1.559 (+1.89%)
KMB 111.84up -0.01 (-0.01%)
HOG 56.78down +0.55 (+0.98%)
OMC 77.92up +0.06 (+0.08%)
MCD 96.65 -1.19 (-1.22%)
QUOTES AS OF 02:14:35 PM ET 04/23/2015
By Ciara Linnane and Tomi Kilgore, MarketWatch

Weather takes back seat to greenback as driver of sales declines

Move over, harsh winter weather. This earnings season, companies have a new whipping boy for any weakness on either their top or bottom lines. It's the dollar.

The U.S. currency has strengthened significantly since the start of the year. The ICE dollar index, which measures the strength of the greenback against a basket of six currencies, has gained 8% in the year so far in anticipation of a U.S. interest-rate hike some time this year. The index is up a stunning 22% in the last 12 months.

For companies that do a large portion of their business overseas, that strength means lower sales when the money is repatriated from a country with a weaker currency. Almost every multinational reporting this week and last has referenced the dollar as a significant headwind, and many have cut their outlooks for the rest of the year because of it.

But do the gentlemen perhaps protest a little too much?

Analysts maintain that there are other factors to consider besides the translation effect. After all, the strong dollar has positive effects as well as negative ones.

"We think we are now entering the second, positive phase of which we've written, with cheaper prices on imported goods and services (P.S. we still import more than we export!) beginning to feed through the pipeline into more spending power for consumers and industries alike," Federated Investors Chief Investment Officer Stephen Auth wrote in a recent note.

MarketWatch columnist Mark Hulbert agrees (http://www.marketwatch.com/story/what-the-strong-us-dollar-really-means- for-stock-prices-2015-02-18), noting that many U.S. companies have major expenses that come from overseas, too, from raw materials to finished materials to labor costs. What's more, the U.S. is running a sizable trade deficit with the rest of the world, equal to more than half a trillion dollars a year.

And dollar strength is certainly not bad for stocks, based on historical evidence.

As the chart below shows, in the 1990s Treasury Secretary Robert Rubin started chanting that a strong dollar was in the best interest of the U.S., in an effort to stem investment outflows. The dollar and stocks rose in unison that decade: The monthly correlation coefficient between the S&P 500 and the Federal Reserve's U.S. dollar broad index, which measures the greenback against a large group of major trading partners, was 0.933, where 1.00 is an exact match.

The dollar-stocks relationship has unhinged since, but there is still no evidence that a rising dollar is bad for Wall Street. Over the past 10 years, the correlation between the S&P 500 and the Fed's USD broad index is -0.034, which implies virtually no correlation at all.

Here are some of the comments companies have made about the dollar this week alone:

General Motors Co. (GM): GM (GM.XX) said currency fluctuations shaved $1.8 billion off first-quarter revenue. The decline was related to the euro, the British pound, Brazilian real, South Korean won and Venezuelan bolivar, the auto giant said in its release.

Procter & Gamble Co. (PG): The consumer giant (PG) said it expects full-year net sales to fall 5% or 6%, with foreign exchange creating a negative 6% to 7% headwind. That's after first-quarter sales took an eight-percentage-point impact from foreign exchange.

3M Co. (MMM): The maker of such products as Post-it Notes said foreign-currency impacts shaved about $90 million of first- quarter pretax earnings, equal to 10 cents per share. For 2015, 3M(MMM) now expects foreign-currency impact to reduce earnings by 35 cents to 40 cents per share, versus a prior expectation of 20 cents.

Under Armour Inc. (UA): The strengthening of the U.S. dollar negatively impacted gross margins at the athletic-apparel retailer (UA) by about 50 basis points for the period, as it purchased most of the inventory for international businesses in U.S. dollars. "Specifically, we expect our second-quarter and third-quarter margins [to] be down approximately 50 basis points compared with last year," the company said.

Kimberly-Clark Corp. (KMB): Sales of $4.7 billion in the first quarter of 2015 were down 4% compared with the year-earlier period, the consume- goods giant (KMB) said. Changes in foreign-currency exchange rates reduced sales by 9 % as a result of the weakening of most currencies relative to the U.S. dollar.

Harley-Davidson Inc. (HOG): "On average, our key currencies were weaker against the U.S. dollar by approximately 14% compared with the first quarter of 2014," the motorbike company (HOG) said this week. Foreign-currency exchange shaved $ 39.5 million off first-quarter sales The company highlighted the euro, yen, Brazilian real and Australian dollar as key culprits. Those currencies lost an average 8% of their from the beginning to the end of the quarter, and were 14% weaker compared with the prior year quarter.

Omnicom Group Inc. (OMC): "While our underlying businesses continue to perform well, the negative impact of FX continues to create a considerable headwind on our revenue," advertising giant Omnicom(OMC) warned this week. This quarter, the impact of foreign exchange reduced revenue by 6.4% or $226 million. "As was the case last quarter," Omnicom(OMC) said, the exchange rate was negative "across every one of our significant foreign markets." As a result, including the "slightly positive" impact of acquisitions, revenue for the quarter was about $3.5 billion, down nine-tenths of 1% from the comparable quarter a year ago, the company said.

McDonalds Corp.: The fast-food giant (MCD) also took a hit from the strong dollar, among other issues. McDonald's(MCD) said currency moves reduced first-quarter earnings per share by 9 cents.

-Ciara Linnane; 415-439-6400; [e-mail]

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