Fashion’s Currency Give and Take

·5 min read

Multitaskers in chief? 

That just might be a better name for fashion’s chief executive and chief financial officers, who are navigating a world that is not just complicated, but in constant motion. 

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Count the latest twist — currency changes that have put the euro and the dollar on an even footing for the first time in 20 years — as another X factor for an industry already dealing with a pandemic, the threat of recession, inflation, the war in Ukraine and more.

“A lot of this is due to the Fed,” said Erik Lundh, principal economist at The Conference Board, referring to the Federal Reserve, which ratchets up interest rates to cool down an overheating economy. “Rates in the U.S. are going up and there’s concern about economic weakness globally and so a lot of money is fleeing to places where people feel safest putting their money. And a lot of times, that is in the U.S. itself.” 

And it’s still not clear just how much interest rates will have to rise to cool off the economy, which added a higher-than-expected 528,000 jobs last month, finally gaining back the positions lost during the first part of the pandemic. 

Like so much else, currency fluctuations are something that happen to companies, not something they can control. The big players do “hedge” against big moves, making multiple investments that will help offset the shifts and smooth out some of the impact.

But predicting how the currency landscape will change is an imperfect science. 

“It’s a really hard thing to do,” Lundh said. 

Companies can skirt the issue some by using local currencies. Tarang Amin, CEO of E.l.f. Beauty, for instance, sees currency as a headwind, but had an air of confidence while going over first-quarter results.

“Because we buy in renminbi in China it hasn’t been as big of an impact as in other companies,” Amin said in an interview. “But we are certainly carrying those headwinds. They’re embedded in our outlook and it’s one of the things I’m proud of, that we’re able to take up our EBITDA [earnings before interest, taxes, depreciation and amortization] guidance 12 to 14 percent even with those headwinds, which I think talks to the overall strength and momentum that we have.”

Companies can also look to build more local production, buying and selling in the same currencies. 

“We absolutely see more interest in ‘local for local’ made products,” said consultant Brian Ehrig, a partner in Kearney’s consumer practice. “Things made in Europe for Europe, things made in or near the U.S. for America, in China that’s already happening.” 

But, for now, the global giants are just going to have to take their lumps.

VF Corp., owner of The North Face and Supreme, saw nearly $100 million worth of its revenues for the quarter ended July 2 slip away into currency translations. That turned what would have been a 7 percent top-line gain before currency into a rise of just 3 percent, to $2.3 billion. Walmart Inc. tagged currency as a $1 billion headwind in the second quarter, with another $1.8 billion hit seen in the second half. 

On their own, those currency changes would be tough enough to take, but they are by no means on their own. 

Andre Schulten, CFO of personal care giant Procter & Gamble, told analysts last month: “The combined year-over-year profit headwinds from foreign exchange rates, freight costs, materials, fuel, energy and wage inflation are an even greater challenge in fiscal ’23 than they were in fiscal ’22.

“Foreign exchange rates have moved sharply against us,” Schulten said. “We now expect foreign exchange to be a $900 million after-tax headwind in fiscal ’23. That is the fastest-increasing headwind….The interest rate differentials keep widening versus the U.S. so we anticipate that headwind could further expand.”

Nevertheless, Jon Moeller, P&G’s chairman, president and CEO, remains confident that the company has the tools necessary to navigate choppy waters. “I’ll repeat what I said on our April 2020 earnings call: the best response to uncertainties and challenges we face is to double down on the integrated set of strategies that are delivering very strong results. It won’t be easy. There will be bumps along the road, but we have the portfolio, superiority, productivity and, in my not-so-humble opinion, the best organization in the world. We have everything we need.”

But for every currency loser, there’s also a currency winner. 

For companies headquartered in Europe, the euro is relatively strong.

Reporting its second-quarter 2022 results, Paris-based L’Oréal, the world’s largest beauty company, said consolidated sales amounted to 18.4 billion euros, up by 20.9 percent on a reported basis, with foreign exchange having a “strong positive 7 percent impact.”

And luxury giant LVMH Moët Hennessy Louis Vuitton saw its first-half fashion and leather goods sales rise 24 percent on a constant currency basis, while the final published result was a stronger 31 percent gain to 18.1 billion euros. 

The currency swings in the market were big enough to prompt an analyst to ask LVMH executives on a conference call if it would produce a kind of gray market. 

CFO Jean-Jacques Guiony made clear that the luxury giant is taking the issue in stride. 

“We tend to have a little bit of a sort of helicopter view on this,” Guiony said. “FX goes up and down. We’ve seen good times, we’ve seen bad times. You’re right that in some cases excessive price differences would create some gray market. It’s not something that we see a lot these days. So we are not particularly worried.

“The index in the U.S. is a little bit higher than we have seen in the past,” he said. “It creates a little bit of activity with U.S. clients in Europe, which is something that we haven’t seen in a very long period of time.

“All in all, I mean for the time being, it’s not a big issue and it doesn’t call for urgent action,” he said. “We’ll see what happens…what currencies create currencies can undo and do fairly quickly. So we tend to look at it very much in a wait-and-see attitude.”

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