The U.S. dollar is sailing at a 12-year high. A strong greenback means that if you travel overseas, hotels and restaurant dinners are cheaper. It also means raw materials produced overseas, such as fabric, zippers and buttons, have suddenly gone on sale.
But if you were one of those U.S. apparel manufacturers who widened your market by selling overseas, you might be facing some financial headwinds this year.
For example, Levi Strauss & Co. in San Francisco noted recently that its fourth-quarter revenues would have grown by 10 percent, but with various currency declines, it rose only 7 percent.
Nike, the athletic apparel and shoe company in Beaverton, Ore., has grown to be a global company with more than 50 percent of its sales coming from overseas. Its executives recently said there might be some financial pushback this year with a strong dollar creating a drag on revenues.
All this can create a challenging world. California Apparel News recently spoke with some finance-industry executives to find out the effects of the strong dollar on local apparel companies.
How are manufacturers coping with the rise in the U.S. dollar regarding exports, and what steps are they taking to minimize its effect on their revenues?
Eric Fisch, Senior Vice President and Regional Commercial Executive, Los Angeles, HSBC Bank USA
As part of an international bank that is committed to helping U.S. businesses expand globally, I regularly talk with manufacturers about the impact of foreign currency fluctuations on their revenue. However, the dollar’s recent strengthening has certainly made some of the conversations around the best methods for mitigating currency risks more urgent.
As a first step to mitigating currency risks, we ask clients to identify the areas of most concern. These can vary from basic concerns of mitigating risks that affect sales margins and cost of goods to mitigating risks associated with fluctuations reported in public-company quarterly statements.
One way U.S. manufacturers are mitigating currency risk from a stronger dollar is using longer-duration currency hedges that allow them to offer a fixed price for goods throughout an upcoming season. We have seen more interest in these lately, especially for companies selling into Europe.
Another way we are seeing some U.S. manufacturers mitigate risk is to make payments in the local currency. Where U.S. companies have historically paid their suppliers in U.S. dollars, we are seeing a shift in interest by U.S. companies to paying in the local currency and hedging the risk themselves.
In some cases this has allowed for tangible reductions in cost of goods as the suppliers overseas were including a buffer in their pricing to allow for any currency fluctuations.
As some manufacturers have learned, insisting on U.S. dollar pricing does not insulate your business from currency exposure. For example, the U.S. dollar has appreciated on average by more than 20 percent over the last year. So, if a U.S. company continues to pay its overseas suppliers in U.S. dollars, it could be paying its suppliers more than 20 percent of what it paid a year ago when translated into the supplier’s local currency.
Ultimately, what’s important for business owners and chief financial officers to remember is that they have built their success on innovative products and services, not on predicting the future movements in the dollar.
A bank with strong foreign exchange experience can have a role in helping mitigate, or at least control, the risks of those movements so the company can concentrate on its underlying business.
Ron Friedman, Partner, Marcum LLP
Our export clients at Marcum are primarily branded manufacturers, who tend to be less hard hit by fluctuations in currency rates than commodity product manufacturers.
Their sales are driven as much by the brand as by the product, and the product is a high-quality, high-demand item. The market for these products tends to remain stable longer.
The rise in the dollar will certainly increase the cost of products manufactured in the United States for foreign consumers, but our clients’ customers are not as price sensitive, and they have more disposable income.
On the other hand, U.S. manufacturers that import product from overseas will see their costs reduced as the dollar gets stronger.
Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.
In its simplest form, when the U.S. dollar rises, it becomes stronger against foreign currencies. That means the amount of foreign monies needed to pay off the dollars becomes larger, meaning more expensive.
Because of this the U.S. exporter might be pressured by the foreign buyer to reduce prices to offset some or all of the increase so they can maintain their gross profit margins. The result could be fewer “purchases” from the foreign buyers, which would have a negative effect on the U.S. exporter’s revenues.
Additionally, if the U.S. exporter is having to negotiate its price due to the strength of the U.S. dollar, the company’s revenue could drop or its gross profit margins could fall due to the increasing strength of the U.S. dollar.
U.S. exporters need to be smart about when and if ever to lower prices to compensate for the strength of the U.S. dollar. Lower prices don’t necessarily mean greater revenues. Normal margins need to be managed and maintained within a relevant range. At the end of the day, the goal is to run a profitable U.S. business. If it means doing a bit less selling overseas, look for ways to increase the domestic market for your products.
At this point in time, I have not seen any significant drop in export revenues to foreign distributors or retailers. While the markets still seem to be strong for U.S. brands overseas, the amount of sales has not been large enough to notice any particular trends.
Sunnie Kim, President and Chief Executive Officer, Hana Financial
As the U.S. dollar continues to strengthen and the economy improves overall, Americans gain more buying power for goods and services overseas.
However, as the growth in Europe and Japan remain stagnant, demand abroad for U.S. goods is lessened and a significant trade gap is created. Additionally, many experts predict that the value of the dollar will increase by 10 percent this year alone.
Therefore, the impact to manufacturers and others will lead to softer sales and profits and may even have a negative impact on future employment. In many cases, manufacturers will be unable to raise their prices in concert with the dollar’s rise against other currencies. Foreign competitors may now have an advantage in production costs as they are not under the same pricing pressures.
In order to offset some of these challenges, many manufacturers have sourced their production closer to some of their major foreign markets in an attempt to minimize currency-fluctuation issues.
However, we should keep the aforementioned in perspective. Those smaller and middle-sized companies that are mostly serviced by our industries generally have less exposure to foreign sales and therefore face less risk than some of the larger multi-national businesses.
Robert Meyers, Interim Managing Director, Bibby Financial Services
Gross margins have been steadily declining for the past nine months for U.S.-based export manufacturers, mirroring the ever-increasing value of the U.S. dollar in relation to most currencies.
Export manufacturing companies with longer-term or fixed-price raw-material contracts are likely near default in their existing financing relationships or larger companies may be suffering challenging quarterly results. Apple Chief Executive Tim Cook even stated that overseas revenue is behind budget.
Other factors to consider:
Declining margins reveal negative short-term implications while yielding longer term opportunities for businesses with a strategic focus on efficiency, process, product diversification and supply relationships.
Middle-market companies can explore overseas acquisition opportunities where they could control the labor or supply costs to make them more competitive.
Some Bibby Financial Services clients are exploring divestitures of their foreign subsidiaries with an eye on strategic or private-equity buyouts if the longer-term trade risk isn’t acceptable or profitable enough.
Several companies are delaying capital-expenditure programs and investments or reallocating budgets toward more domestic interests.
Don Nunnari, Executive Vice President/Regional Manager, Merchant Factors Corp.
Historically, export sales of our factored clients have been a very small percentage of the manufacturers’ overall sales.
Frankly, we have not heard from any clients complaining that the surge in the U.S. dollar has negatively affected their sales or profits. They seem to be selling at the same pace as before.
However, large apparel companies selling in multiple countries and sourcing goods in different countries have been affected. On a recent earnings call, Ralph Lauren Corp. reported that unfavorable foreign currency fluctuations could cost the company 200 basis points (or 2 percent) in gross margins in 2015.
At current currency levels, they project 2016 sales and profits would be impacted. In a Wall Street Journal article on March 31, Prada and Chanel reported that a weakened euro against the dollar in the past months has caused them to evaluate cutting prices in Asia to reduce the differential with European prices.
Jeffrey Sesko, Vice President, Rosenthal & Rosenthal Inc.
Our strengthening currency affects various sectors differently, with U.S. manufacturers potentially encountering the greatest risk from the surging U.S. dollar.
Product exported by U.S. manufacturers becomes far less attractive to foreign consumers as a stronger U.S. dollar dramatically increases the purchase price for the foreign consumer. Consequently, this has a negative impact on revenue generated overseas.
This also poses an increase in competition from foreign entities who export their products to the United States as they deliberately drop their prices in an effort to increase sales into the U.S.
On the positive side, a rising dollar decreases the cost of the aforementioned imports, which U.S. manufacturers can take advantage of by purchasing more products abroad.
Lastly, since businesses are under no mandate to transfer the profits they earn from their exports, they may elect to reinvest the cash in foreign markets. As a result, they will avoid paying U.S. taxes.
Overall, manufacturers that rely less on sales to foreign countries should be in a more favorable position as they aren’t affected as much by the rise in our dollar.
Ken Wengrod, President, FTC Commercial Corp.
If you need to cope with the rise in the U.S. dollar ... it’s too late.
Like most economists, many manufacturers were taken off guard by the recent surge of the U.S. dollar. With the exception of using derivatives and hedging currency risk, exporters do not have many options to cope with the rising U.S. dollar.
An astute apparel exporter should understand the importance of having a strong presence in Asia and Europe and that it will create a further demand for their merchandise in the U.S.
We see numerous companies power branding their image by placing their merchandise in key foreign retailers such as Selfridges, Harvey Nichols and Lane Crawford and online sites such as Net-a-Porter and Farfetch. This sort of advanced creative thinking can ultimately bolster their U.S. sales because numerous U.S. retailers shop those markets to look for new trends.
The real question that the exporters should consider is how to keep their price level once the dollar weakens and capture the positive effects on their margins.
Before manufacturers consider exporting, they need to know their competitive advantages and cachet. The exporters should focus on their ultimate customer, the consumer, and what makes their merchandise truly unique for the local market that they are selling to.
The demand for California lifestyle apparel and luxury items, such as leather merchandise and accessories, which are manufactured in the U.S., is still high in Europe and Asia. It hasn’t been affected by the surge in the U.S. dollar.
People are willing to purchase items that have a certain cachet—a design that represents a certain lifestyle—and it separates the consumer from the crowd. This makes them feel good, even if it might be irrational.
We also see this behavior in our domestic market. A T-shirt being sold in a mass merchandiser for $20 is manufactured with the same piece goods as the T-shirt being sold for $70 in a small luxury store.
Yet, some buyers truly feel that there is a dramatic difference in the item. It’s a perception vs. the reality. This is one of the reasons that price should not be considered a long-term competitive advantage. It should only be considered as a temporary advantage, depending on the strength of the U.S. dollar.
Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners
The U.S. dollar has seen its fastest increase in over 40 years and is up 14 percent since the beginning of 2015.
The rising U.S. dollar makes U.S. exports more expensive in international markets, reducing sales and profitability for large U.S. multinational companies that derive a large percentage of their sales outside the U.S.
At our Roth Capital Conference March 8–11, the institutional investors we met with were seeking public and private-growth companies that had less exposure to international markets and stood to benefit from lower gas prices domestically, along with an improving job market.
Many of the growth and middle market businesses we work with generate less than 15 percent of their sales internationally, so they have not been impacted as severely as large multinational companies.
Some of our clients with international sales in excess of 15 percent have implemented hedging strategies to offset a rising dollar, but most are focusing their efforts on finding ways to drive higher margin sales through their own stores or online through their websites.