The dollar is now corporate America's worst enemyAugust 1, 2012: 11:22 AM ET
Listen in to the earnings calls from multinationals this quarter and you'll hear a common refrain: Fear the stronger dollar.
A stronger dollar isn't always bad news for corporate America. But as the growth of earnings decelerates in the second quarter, CEOs from McDonald's (MCD) to Colgate-Palmolive (CL) say that an appreciating dollar has been bad for business lately. Not only does it make products more expensive, but it also means sales made overseas aren't worth as much when converted into a stronger greenback.
To be sure, most companies generally prepare for fluctuating exchange rates. They could raise prices, for instance. But the pace at which the dollar has strengthened in the three months ending in June has surprised most executives. During the second quarter, the dollar gained 5% against the euro. As Europe's ongoing debt crisis took a turn for the worse, investors looking for a safer place to park their cash turned to the U.S. dollar. As of Wednesday morning, it stands at $1.2311 per euro in New York.
Tupperware (TUP) is among the latest companies hit by the stronger dollar. On Tuesday, the Orlando, Fla.-based home products line reported that net income slid 81%. That beat Wall Street expectations, but the company said the stronger dollar, among other factors, will dampen results going forward. Revenue fell 5% to $638.9 million from $699.9 million. If the impact of exchange rates weren't a factor, revenue actually would have climbed by 5%.
In a call with analysts Wednesday, Colgate-Palmolive reported that profits edge up by 0.8%. CEO Ian Cook said foreign exchange rates cut the world's largest toothpaste maker's bottom line by 9%. If exchange rates remain the same as today, he said, profits could fall 6% to 7% for the year.
Many analysts think the strengthening dollar isn't expected to go away, at least not any time soon or so long as Europe's ongoing debt crisis continues to rattle markets. Companies are watching closely, warning investors that exchange rate fluctuations could be difficult to manage going forward.
On Thursday, Amazon.com (AMZN) reported a decent bump in sales for the second quarter, but missed Wall Street expectations. Profits declined 96% to $7 million, compared with $191 million a year earlier. As Fortune pointed out, the softer profits come as the company invests heavily to expand multiple businesses to achieve long-term gains.
While that's certainly a factor, fluctuations in exchange rates, among other variables outside the walls of Amazon, could also impact earnings going forward. "Our results are inherently unpredictable and maybe materially affected by many factors including a high level of uncertainties surrounding exchange rate fluctuation as well as the global economy consumer spending," chief financial officer Tom Szkutak told analysts during a conference call.
So while we watch the world's reserve currency rise to the top, it's threatening most everyone's bottom line.