More S&P 500 Companies Seeing Negative Impact from FX Than Tariffs in Earnings Calls for Q2

While the majority of S&P 500 companies will report earnings results for Q2 2018 over the next few weeks, about 5% of the companies in the index (23 companies) had reported earnings results for the second quarter through July 12. Given the expectations for about 20% earnings growth for the second quarter (and for the next two quarters), have these companies discussed specific factors that had a negative impact on earnings or revenues for the second quarter (or are expected to have a negative impact in future quarters) during their earnings conference calls?

To answer this question, FactSet searched for specific terms related to a number of factors (i.e. “currency,” “China,” etc.) in the conference call transcripts of the 23 S&P 500 companies that have conducted second quarter earnings conference calls through July 12 to see how many companies discussed these factors. FactSet then looked to see if the company cited a negative impact, expressed a negative sentiment (e.g. “volatility,” “uncertainty,” “pressure,” “headwind,” etc.), or discussed clear underperformance in relation to the factor for either the quarter just reported or in guidance for future quarters. The results are shown below.

Foreign exchange has been cited by the most companies (12) in the index to date as a factor that either had a negative impact on earnings or revenues in Q2, or is expected to have a negative impact on earnings and revenues in future quarters.

After currency, the next four factors with the highest number of companies citing a negative impact are related to costs. If these four “cost” categories (raw material, transport, labor, and oil/gas) were combined, the total number of companies citing a negative impact from at least one of these four categories would be 14, as several companies cited a negative impact from more than one of these factors during their earnings calls.

It is interesting to note that the term “tariff” has been mentioned during the earnings calls of six S&P 500 companies to date. However, only one of these six companies (Lennar) cited a direct negative impact from tariffs. With the imposition of additional tariffs in recent weeks by both the U.S. and China, more companies in the index will likely discuss this topic on earnings calls for the second quarter over the next few weeks.

What Companies Are Saying 

Tariffs

“Given our progress in these and other categories, we're on track to meet or exceed our 2019 target of $265 million of direct construction cost synergies. We expect to accomplish this despite the backdrop of serious industry headwinds of a tight labor market, elevated lumber prices and international trade tariffs.” -Lennar (Jun. 26)

FX / Currency

“And currency volatility remains significant and causes us to be deliberate with our pace of investment. Moves in the foreign currency rate of greater than 5% from one quarter to the next are common.” -AutoZone (May 22)

“Importantly, in regard to Q1 guidance, exchange rates have moved from a 3% revenue tailwind to now being a 1% headwind from the last time I gave guidance. That is a 4% negative move, which impacts revenue in Q1 by about $300 million. It also impacts EPS negatively by $0.03.” -Oracle (Jun. 19)

“While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impact of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14.” -Carnival (Jun. 25)

“Margin will be negatively impacted by approximately 35 basis points from FX but we expect to deliver our 100-basis point margin expansion target normalized for FX.” –IHS Markit (Jun. 26)

“For the full-year, gross margin contracted just under 80 basis points as strong underlying product profitability was more than offset by a 90 basis point headwind from foreign exchange.” -NIKE (Jun. 28)

“So, there are really two components. So, FX was a small headwind to GP in Q1, but it was a larger headwind at operating income because we have – as the peso weakened in the quarter and we had to reval our peso receivables with the biggest one being our VAT receivable, there was a reasonably sized SG&A drag on our beer business. So, again, at the operating income line, it was a larger drag than it was at the GP line.” -Constellation Brands (Jun. 29)

Higher Costs (Materials, Freight, Labor, Oil, etc.)

“On the cost front, I've highlighted the past few quarters the impacts we are experiencing from accelerated pressure on wages. Those pressures continue to exist and are much more than historical norms.” -AutoZone (May 22)

“I think in the food and sundries side, it's [inflation] picked up a little bit. And again, in talking to the buyers, a big chunk of that has to do with freight. And I think one of the analyst reports out there and the title was called frieghtening changes to cost…And I think on the food and sundries side, it was up in the 2% to 3% range. And probably two-thirds of X was more related to the freight-related costs.” -Costco (May 31)

“Restaurant labor was unfavorable 90 basis points, as continued wage pressures, workforce investments, and Cheddar's brand mix offset pricing and productivity gains.” -Darden Restaurants (Jun. 21)

“While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impact of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14.” -Carnival (Jun. 25)