How Exchange Rates Are Hammering Some Of Your FTSE Favourites

A strong pound is having an adverse impact on the sales and profits of some of your favourite big-brand FTSE companies. Just how bad is the situation, and should shareholders be concerned?

Diageo (LSE: DGE), the owner of world-leading brands, including Johnnie Walker whisky and Smirnoff vodka, is just one of our top blue chips suffering from high exposure to the recent economic and currency weakness across many emerging markets.

A year ago, Diageo guided for a £55m adverse impact on operating profit from exchange rates for the company’s financial year to 30 June. The figure had risen to £280m by January this year, and £330m by April (representing a hit to annual operating profit of getting on for 10%), with Diageo highlighting currency chaos in Venezuela in particular.

Similarly, iconic British fashion house Burberry (LSE: BRBY), which sells particularly well in the Asia Pacific region, last month gave guidance on the impact of exchange rates for its financial year to 31 March 2015. The company said that at current exchange rates the impact “will be material”: more specifically, £50m — equivalent to 15% of last year’s reported profit.

Reckitt Benckiser (LSE: RB), the owner of Cillit Bang and other top household cleaning brands, gave us a broader regional idea of currency impacts on sales in this year’s first-quarter results.

Region Sales growth at constant exchange rates Sales growth at actual exchange rates Impact of exchange rates
Europe/North America +2% -3% -5%
Latin America/Asia Pacific +12% -6% -18%
Russia/Middle East/Africa +4% -12% -16%

Meanwhile, the shares of ASOS (LSE: ASC), the high-flying online global fashion destination for 20-somethings, fell 30% on the release of a trading update last week. The company reported negative currency impacts on sales for the three months to 31 May in the EU (-5%), the US (-11%) and the rest of the world (-15%).

The resultant higher mix of UK and European sales, which have lower margins, led ASOS to warn on profits for the company’s current financial year to 31 August, with margin guidance reduced to 4.5% from 6.5%.

As the ASOS numbers imply, the euro, while not as strong as the pound, has nevertheless strengthened against many currencies around the world. As such, Unilever (LSE: ULVR), which reports in euros, has also suffered from adverse exchange rates. The consumer goods giant, whose brands range from Ben & Jerry’s ice cream to Dove beauty products, reported a 9% negative currency impact on this year’s first quarter sales.

For inexperienced investors in these popular FTSE companies, the reported sales and profit numbers, and recent uninspiring — or downright dire — share-price performances may seem scary. However, the impact of exchange rates on big multinational companies waxes and wanes, positively and negatively.

Here at the Motley Fool, we believe in investing in companies for the long term. And if you’re a long-term investor, be assured that short-term currency movements are nothing to worry about.

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G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco and Unilever, and has recommended shares in ASOS.