Analysis: Euro exposure could bite some U.S. consumer names

By Lisa Baertlein

LOS ANGELES (BestGrowthStock) – Europe’s debt trouble is translating into profit woes for U.S. consumer names like McDonald’s Corp (MCD.N: ), Burger King Holdings Inc (BKC.N: ) and jeans maker Guess Inc (GES.N: ) as the weak euro dents profits.

Last year, many large U.S. consumer companies benefited from a slump in the dollar, which makes U.S. goods cheaper for foreign buyers. Now, the opposite appears inevitable as the euro languishes and the risk of a double-dip recession looms over Europe, a major U.S. trading partner.

McDonald’s and Burger King — the top two U.S. hamburger chains — earlier this week reversed their views on foreign currency (Read more about trading foreign currency., saying they now expect exchange rates to take a bite out of full-year profits.

In the case of McDonald’s, the euro accounts for roughly one-fourth of consolidated operating income.

Other U.S. corporations, including Coca-Cola Co (KO.N: ), Philip Morris International Inc (PM.N: ), H.J. Heinz Co (HNZ.N: ) and Tupperware Brands Corp (TUP.N: ) also could be at risk from the weak euro, which on Monday hit its lowest level against the U.S. dollar since early 2006.

“Consumer companies are probably the most vulnerable” to the currency gyrations since earnings derived in Europe are now translating into fewer dollars, said Keith Goddard, president of Capital Advisors, which has $800 million under management.

Companies that are seeing softness in their business, or that just want to lower expectations for the second half, could “incorporate currency as part of the blame,” he said.

“If you’re McDonald’s (the euro impact) is pretty direct,” said Goddard. “If you’re GE and you’re guiding differently because of currency, it’s a little more suspect.”

Executives from major manufacturers like 3M Co (MMM.N: ) and Honeywell International Inc (HON.N: ) have also identified the weak euro as the next big threat to profits.

EXPOSED IN EUROPE

The 10 percent move in the euro since April has shaved about 6 cents of earnings per share at McDonald’s, Jefferies & Co analyst Jeff Farmer said in a client note. He added that his full-year call for a profit of $4.50 per share already reflects the effects of foreign currency (Read more about trading foreign currency. exchange at McDonald’s.

“McDonald’s, by far, has the most exposure to the euro” among U.S. restaurant names, said Buckingham Research Group analyst Mitch Speiser.

Burger King, which said Germany was the only international market to contribute 10 percent or more to total revenue in the latest reported quarter, expects currency to slice as much as 2 cents per share from the current quarter’s earnings.

Analysts also said that proposed austerity measures for tackling debt in some European countries could lead consumers there to scale back spending and amplify risks.

Domino’s Pizza Inc (DPZ.N: ), Starbucks Corp (SBUX.O: ) and Yum Brands Inc (YUM.N: ), the parent of Taco Bell, KFC and Pizza Hut, are far less exposed to the euro, but their earnings per share could still get hit by “a penny here, a penny there,” Speiser said.

A spokeswoman for Starbucks said: “Overall, our exposure to the euro is small relative to other currencies.”

Starbucks, which uses hedging to mitigate exposure to some currencies, said in April it expected foreign exchange to be neutral to slightly positive to operating profit for the balance of its fiscal year ending in September.

UP IN SMOKE?

The euro is the single most important currency for Philip Morris International, where the European Union contributed roughly 40 percent of company revenue and operating income during the March quarter.

Some analysts expect Philip Morris International to cut its profit target at its analysts’ day later this month. Worries also persist about trade-down to less expensive brands in Europe and possible cigarette tax increases in the region.

Jack Daniels seller Brown-Forman Corp (BFb.N: ) warned on Wednesday that earnings per share for its fiscal year ending in April 2011 could be reduced by 15 cents based on current foreign exchange rates.

Coca-Cola also is dependent on Europe, which accounted for almost 17 percent of operating revenue and a third of operating income in the latest quarter.

“We are actively monitoring the situation in Greece and the related impact on the euro,” the company said in a statement. “We are 100 percent covered on the euro for 2010 and are continuing to execute our strategy to cover over multiple years when appropriate.”

Heinz, which gets more than 60 percent of its sales from outside the United States and has significant exposure to Europe, last month said its earnings would be significantly affected by foreign currency (Read more about trading foreign currency. fluctuations.

The maker of Heinz ketchup and other items forecast fiscal 2011 earnings per share of $3.06 to $3.16 on a constant currency basis. However, based on the average forex rate at the time of the forecast, on May 27, Heinz said it would be $2.95 to $3.05.

“In this volatile economic environment, our reported results will likely be affected by significant currency fluctuations,” Heinz Chief Executive William Johnson said.

Abercrombie & Fitch Co (ANF.N: ) has a flagship store in Milan, which is in the eurozone, and in London, which is not. Still, the company’s European business is smaller than its other segments, said Dorothy Lakner, analyst with Caris & Co.

“The issue with the company is that international expansion was looked upon as a real positive for the company and that has stalled,” said Lakner, who added that Gap Inc (GPS.N: ) also has small euro exposure.

Elsewhere, Neiman Marcus Group Inc (NMRCUS.UL: ), the operator of Neiman Marcus and Bergdorf Goodman stores, said it is monitoring Europe’s debt crisis and has yet to see vendors there pass on gains from a weak euro. Neiman also noted that a weak euro could cut travel to New York, affecting sales at its Bergdorf Goodman stores in Manhattan.

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(Additional reporting by Martinne Geller, Dhanya Skariachan and Nivedita Bhattacharjee in New York; Editing by Michele Gershberg and Gerald E. McCormick)

Analysis: Euro exposure could bite some U.S. consumer names