It seems that the emerging-currencies debacle has not yet come to an end. The story has been in the news for some time now, as volatility in emerging-markets currencies has been eating into the bottom line of many consumer staples companies that operate in these regions. One of the most seriously affected places seems to be Venezuela, as the country's currency manipulation efforts are weighing on the results of companies like Colgate-Palmolive (CL 0.54%), Procter & Gamble (PG 0.91%), and Unilever (UL 0.68%).
Venezuela's economy is a bit of a mess at the moment, largely due to strict currency and spending controls aimed at reining in the company's sky-high inflation. With inflation currently racing at more than 55% per year, something must clearly be done. Many question the country's anti-inflationary methods, however, which are seen as counterproductive and authoritarian. In fact, some of the methods put in place to stem inflation seem almost draconian by our standards.
First of all, a dual-currency system was established. This system allowed the official rate to be used for essential goods such as food and medicine, while another, higher rate would be used for remittances and certain investments. The black market rate on the bolivar is now some 12 times higher than the official quote. The government also recently put a measure in place to curb corporate profits, setting the limit of company profits at 30%. Anything above that would lead to prison sentences. Needless to say, the bolivar has not responded favorably.
Some of the companies affected
Not too long ago, consumer staples heavyweight Procter & Gamble cut its profit outlook for this year, citing exchange rate and policy changes in Venezuela as the prime culprit. The company now expects its core EPS to grow by 3%-5% for the year versus a previous forecast of 5%-7%. The currency effect charges seem to have come as a bit of a surprise as the company stated in its last earnings report that it expected no further currency effects within its guidance range. While P&G only earns about 2% of sales from Venezuela, the market clearly is dragging down the bottom line.
Now, Colgate-Palmolive has come out with a similar warning. The world's largest maker of toothpaste has stated that it expects a loss of between $180 million and $200 million due to Venezuelan currency effects. Earnings are now expected be reduced by $0.03 to $0.04 in the next quarter, after last month's statement that 2014 sales and earnings will be hit by around 3% and 4%-5% respectively. Slightly more exposed to Venezuela than P&G, Colgate-Palmolive derives some 4% of sales from the Latin American nation.
As for European consumer goods titan Unilever, the warning that volatility in emerging markets currencies would be hitting the bottom line came some time ago. The company's profit warning last year, its first in 10 years, roiled consumer goods stocks. Its latest report was nowhere near as bad as feared, however, and actually showed emerging markets growth of around 8.4%. As such, the company will be sticking to its guns and maintaining its current strategy.
The bottom line
Recent warnings from consumer staples giants such as Procter & Gamble and Colgate-Palmolive have underscored the interconnectivity of global markets. While Venezuela accounts for only a small portion of sales for these companies, currency devaluation and volatility in the country is expected to have a large impact on these companies' bottom lines. As such, these two American firms have cut their earnings guidance, sending shares down. Consumer goods investors would be wise to take note of increasing volatility in certain emerging markets currencies.