Restaurant chains that do business abroad have a new enemy this earnings season: the U.S. dollar, which has been increasing in value compared with other foreign currencies over the past year.
The value of the dollar has risen 8 percent for the year and 22 percent over the past 12 months.
In November, a single euro was worth $1.26. Today, one euro is worth $1.07, a significant change in six months. And it’s serious to large companies that sell goods and services in foreign markets.
When McDonald’s sells a Big Mac in Europe, the customer pays in euros. When the company brings those euros home, it converts them to U.S. dollars. As the dollar strengthens, those euros buy fewer dollars, diminishing the profit the company earns.
As a result, companies including car makers, airlines and consumer goods producers have all said that currency rates will weigh on profits and revenues this year.
Restaurant companies are no exception. Chains large and small have expanded aggressively in foreign markets because the U.S. market is saturated and international markets offer the lure of growth. But this earnings season they’re encountering challenging exchange rates.
No operator has been hurt as much as McDonald’s. The company’s revenue fell 11 percent in the first quarter ended March 31, from $6.7 billion, to $5.9 billion the previous year. But the company said revenue fell only 1 percent excluding currency translation.
Do the math, and that’s a $600 million impact just from the strong dollar. Put another way, the exchange rate shaved off the equivalent of Qdoba’s annual systemwide sales from McDonald’s revenue in the first quarter alone.
Yum! Brands Inc. said foreign currency rates would impact its earnings this year by about 5 percentage points. Executives said during an earnings call this week that currency rates hurt operating profit by $20 million in the first quarter.
Domino’s Pizza Inc. also has a broad international presence. The company said the strong dollar hurt earnings by $3.6 million in the first quarter. Executives added that the dollar could impact earnings this year by as much as $20 million.
Mike Lawton, Domino’s CFO, said a 1-percent strengthening of the dollar hurts earnings by 2 cents per share.
Starbucks Corp. said foreign currency translation would have a 2-percent impact on revenue this year. The company said the strong dollar was a 2-percent “headwind” in the first quarter, when it recorded $4.6 billion in revenue. Therefore, exchange rates had a $92 million impact on Starbucks revenue.
This might seem like more excuses on the part of executives, who seem to find a new earnings bogeyman every year. But these are real numbers, and they have a tangible impact on the bottom line.
The good news for executives is that investors are ignoring the impact of exchange rates. Starbucks stock has risen more than 4 percent as of late morning Friday. Yum’s stock price increased after its quarterly earnings report on Tuesday. And Domino’s stock rose nearly 10 percent on Thursday.
Even McDonald’s, which reported one of the biggest impacts from currency exchange rates on Wall Street, saw its stock price increase more than 3 percent on Wednesday after its quarterly earnings report.
Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze
