NEW YORK (AP) – The biggest obstacle for Coca-Cola and Pepsi these days isn’t tied to taste tests, the declining popularity of sugary drinks or even their century-long rivalry. It’s the surging US dollar.
The two soda giants rely on overseas customers for roughly half of their revenue. When they turned in their quarterly results last week, both reported a drop in sales. The strong dollar made all the difference – strip it out and shrinking sales suddenly rise.
The dollar has been a source of constant complaint this earnings season. Global corporations from Avon Products to Yum Brands have said their quarterly results would have been much better if it hadn’t been for the rising dollar. For some, the currency’s strength has meant the difference between a profit and a loss.
“It has really hit earnings,” said Jack Ablin, chief investment officer at BMO Private Bank.
Over the past year, the dollar has climbed 18 per cent against major currencies. The surging dollar and plunging oil prices are the main reasons analysts keep cutting their forecasts for corporate profits even though economists expect the US economy to pick up speed.
Back in October, analysts estimated that companies in the Standard & Poor’s 500 index would post profit growth of 11 per cent for the final three months of 2014. That forecast now looks overly optimistic. With only a handful of companies left to report, corporate profits are on track to rise more than seven per cent, according to S&P Capital IQ.
Forecasts for this year have taken a much bigger hit. In December, for example, analysts projected that profits would increase nine per cent in the first quarter. Today, they expect them to shrink more than two per cent over that same period.
A strong US dollar might seem like a badge of honour, a reflection of US economic power in the global economy, but for much of Corporate America, it’s bad for business. Almost half of all revenue for companies in the S&P 500 comes from outside the United States, mainly Europe and Asia. So when the dollar rises against the euro, it hurts in two ways: Prices of American-made goods become more expensive to customers in Europe, and goods that move off foreign shelves translate into fewer dollars, showing up as lower revenues and earnings on quarterly financial reports.
Take Avon Products, a company that depends on customers in Latin America for nearly half of its sales. Last week, the cosmetics company reported that its revenue fell 12 per cent and adjusted earnings sank 41 per cent. Erase the dollar’s move against foreign currencies and the picture looks entirely different. Revenue would have climbed five per cent, and adjusted earnings would have soared 29 per cent.
At Procter & Gamble, revenue fell four per cent in the quarter but would have increased two per cent if the dollar had stayed put. And the maker of Tide detergent and Pampers diapers doesn’t think the drag from the dollar is over yet. It estimates that the currency’s rise will shave $1.4 billion from its profit over the course of the full year.
“This is the most significant fiscal year currency impact we have ever incurred,” said P&G’s chief financial officer, Jon Moeller, in a conference call discussing the latest results.