Global fashion brands based in the US could face an increasing headwind from a strong dollar

Global fashion brands based in the US could face an increasing headwind from a strong dollar

Global fashion brands based in the US could face an increasing headwind from a strong dollar, an analyst has warned.

In a note, UBS analyst Michael Binetti has cut his 2015 profit estimates for a number of US-headquartered companies, including Nike, VF Corporation, Ralph Lauren, PVH, Coach, Hanesbrands and Foot Locker.

Wall Street has already cut consensus estimates in line with the negative impact of the stronger dollar on revenue, but Binetti contends that these fail to reflect the disproportionate impact on earnings per share.

He says the companies mentioned typically generate 25-50% of their profits overseas and, because international operations are generally more profitable and attract a lower tax rate than domestic businesses, the impact of a stronger dollar on earnings could be 1.5 times bigger than its effect on sales.

Using VF as an example, Binetti calculates that, if its revenue is impacted by 3.4 percentage points (US$420m) this year, this would translate to a 5.2 percentage point decline in earnings per share.

But the analyst also says: “Despite a volatile FX and geopolitical backdrop, we still prefer global brands with access to global growth.”