Told you so....(*) The falling dollar is but the TransAtlantic lobby's gimmick to generate a phony growth in Europe:
A weak dollar brings U.S. brands a bonanza of euros
Erika Kinetz IHT
Thursday, February 12, 2004
NEW YORK It's a bit like getting free money. For U.S. apparel companies pushing into Europe, the downward march of the dollar has given a fat, if temporary, boost to revenues and profits.
The dollar has lost about a quarter of its value against the euro in the last year and about one-third of its value in the last two. (The dollar closed at E1.27 on Wednesday.) "It's a magnificent blessing," said Laurence C. Leeds Jr., the chairman of Buckingham Capital Management, a New York investment firm.
Punch the dollar down 30 percent, and voilà: $100 in euro-denominated sales becomes $130 when you bring the money back home, in dollars; a $10 profit swells to $13. "That's pretty good," said Leeds.
With a significant chunk of European business, the only regret companies like Liz Claiborne, Tommy Hilfiger, Quiksilver, and Timberland might have in common is not getting into the euro zone fast enough or deep enough.
Of course, apparel businesses are not built on currency arbitrage, and this time next year, the magnificent blessing of euro-dollar appreciation may have disappeared just as it came, with a poof of smoke.
But for now, booming euro revenues have handily outpaced domestic revenue growth. There seems to be little downside. Polo Ralph Lauren reported a minuscule $3.6 million foreign currency loss from unhedged inventory purchases in Europe last quarter, but, in general, analysts say, even capital expenditures for euro zone expansion are minimal compared with the euro revenues that have been pouring in.
In the third quarter of 2003, domestic net sales for Liz Claiborne increased by $70 million, or 8.4 percent, to $906.3 million. International net sales increased by $63 million, or 30.7 percent, to $267.9 million. (About $33.4 million of that increase was due to the impact of currency exchange rate fluctuations.)
Similarly, net revenue at Tommy Hilfiger Europe leapt 40.9 percent, to $59.8 million, for the quarter ending Dec. 31, 2003. ($9.5 million of that growth came from currency exchange rate fluctuations.) Meanwhile, net revenue in the United States fell 12.6 percent over the year-earlier period, to $359.3 million.
Revenues at Timberland, where international sales accounted for 38.5 percent of total sales last year, jumped 27.4 percent last year, to $1.34 billion. However, more than half of that surge was due to foreign exchange rates. The revenue increase in constant dollars was 13.6 percent.
At Quiksilver, revenues in the Americas, most of which come from the United States, increased 18 percent last year, to $492.4 million, while European revenues increased 37 percent in dollar terms, to $386.2 million. But wipe out dollar depreciation and you wipe out that edge: As measured in euros, European revenues increased only 15 percent.
Tim Stewart, chief currency strategist at Morgan Stanley, said that while the euro could well move back up to $1.30 or $1.35, he thinks the bulk of the dollar's adjustment against the euro has already happened. "Can you paint scenarios of how the euro can approach $1.40 or $1.50?" he said. "Yes, you can. Steve Roach, our chief economist has. That's not my view."
The slide, he said, looked especially dramatic because the dollar rose to such
dizzying and unjustified heights in the fourth quarter of 2002, when the euro
was down to $0.89. He likes to remind people that when the euro was launched,
it traded at $1.19 and was widely expected to rise.
Stewart places a fair value of $1.05 to $1.15 on the euro. But many of the factors that he attributed to the overvaluation of the euro were not likely to be resolved easily, or quickly. Global unease about President George W. Bush's geopolitical decisions, his monetary policy and his fiscal policy - namely, the projected $521 billion U.S. budget deficit - helped erode the dollar.
The bursting of the stock market bubble in the late 1990s also made the $500 billion U.S. current account deficit harder to fund, which added to the downward pressure. Moreover, interest rates in the United States are lower than in Europe, a situation Stewart said was unlikely to change before the second quarter.
Still, even if the euro does not shed 15 or so cents and fall in line with his valuation immediately, Stewart does not expect the euro to creep much higher.
Tommy Hilfiger seems to agree. The company said continued contraction in its U.S. wholesale business next year would be partially offset by the growth in its European operations, but at a slower pace, in part because it does not anticipate further strengthening of the euro against the dollar. Overall, the company expects earnings per share and sales next fiscal year to be lower than they were this year.
Currency issues aside, both Tommy Hilfiger and Liz Claiborne have been
emphasizing European expansion while cutting back on their U.S. operations.
Since its launch in 1997, Tommy Hilfiger's European business has grown
dramatically. The company had 65 retail locations in 28 European countries at
the end of fiscal year 2003. On Feb. 19, a new shop in Munich will open, and
the company plans to set up stores in Amsterdam, Madrid, and Stockholm in
late spring.
Similarly, according to Liz Claiborne's latest annual report, international sales
accounted for 20 percent of revenues in 2002, up from 7 percent in 2000. Mexx,
the Amsterdam-based retailer company acquired in 2001, gives the company
an impressive global distribution network - 9,000 points-of-sale, including 115
company-owned stores in more than 50 countries. All these can be used to
bring its Ellen Tracy, Juicy Couture and Lucky brands into Europe.
Meanwhile, Tommy Hilfiger closed 38 U.S. stores in the third quarter of last
year and starting in April, the company plans to cut back deliveries to Dillard's
department stores by 30 percent. Last year, Liz Claiborne closed all 22 of its
Liz Claiborne boutiques in the United States.
"On the margin we're hearing more about European expansion," said Marie
Driscoll, a retail analyst at Standard Poor's. She added: "You've got to wonder
do these companies see an end to domestic growth?"
Officials at Liz Claiborne declined to comment, but such decisions are likely to
be driven by distribution and brand strategy as much as geography.
Moreover, retail in Europe, as in the United States, is a mature sector. "If they can capture any percentage of the European market, it's growth for that company," said Heather Brilliant, an analyst at Morningstar. "But retail in Europe is incredibly competitive."
While there still seems to be unmet demand for U.S. brands overseas, nobody expects Europe to surpass the United States as an engine of economic growth and consumer spending. "Our economy is better," said Leeds. "The consumer is more active here, more optimistic, more willing to spend money."
Erika Kinetz is a freelance journalist based in New York.
iht.com
(*) Message 18958508
Isn't it wonderful, Darleen? There's absolutely NO growth in Europe (we're actually in recession).... Unemployment is booming everywhere... Most households who had access to plastic/credit are overburdened with debts... Yet, the "magic" is still there: thanks to a falling dollar, there's 30% consumer-spending growth in Europe! |
