It’s no secret that the US dollar is getting stronger, and while for some, that might mean getting a good shopping deal while traveling across the globe, for most retailers—it's hurting their bottom line. Fashion retailers—including Primark and H&M—have all stressed that the strengthening dollar is damaging to their business.
“Headwinds from foreign exchange shifted significantly in the last 90 days as the trend of US dollar strengthening has accelerated,” Nike CFO Matthew Friend said in an earnings call last month.
Levi’s also reported last week that its Q3 2022 gross margin was down 60 basis points YoY, driven largely by the increase in value of the US dollar (which was a significant driver of this decline).
So, what can retailers do to combat the rising dollar? We asked three fashion experts to weigh in.
These interviews have been edited and condensed for clarity.
Brian Ehrig, partner, Kearney’s consumer practice
How are fashion retailers being impacted by the strengthening dollar
Most companies are transacting in US dollars to buy their goods, no matter where in the world they’re buying it. To the extent that the bulk of their sales are happening in the US, that means it's kind of a boon for them, because the inputs for fashion products aren’t coming from other countries where if the dollar gets stronger against any one currency, that means the materials are cheaper now, the labor is cheaper now. So overall, the product is going to be cheaper, and that should actually have a positive effect when they import it to the US. But for global brands still making their products at the same places—like Vietnam or China—but selling them all over the world, it’s a more complicated story, because now they’re going to have a significant earnings hit when they convert those international sales back to US dollars.
What lies ahead?
We really keep coming back to the same fundamental problems in the industry, that really starts with exceedingly long lead times. So these decisions around how much inventory they have were made months ago, potentially before we were even talking about inflation and definitely before we were talking about a very strong dollar. Plus, retailers are notoriously poor at planning and forecasting their demand. You put long lead times together with a lot of uncertainty in demand and you really have a recipe for poor outcomes.
Garrett Sheridan, CEO, Lotis Blue Consulting
What can fashion retailers do to minimize their losses?
The more affluent consumer has an opportunity in this particular market. Companies need to think about a few things: Can they do better currency hedging? And is there an opportunity to think about sourcing locally where you could give up some margin for more reliability of supply chain and more locked-in cost? And then thirdly, can we manufacture locally? Can we figure out a way to diversify the supply chain a bit so that we’re less open to shocks from supply chains, inflation, or consumer weakness in terms of demand?
What lies ahead?
Consumers struggling to make ends meet to pay their bills—their discretionary spending is going to take a while to bounce back. If I were a fashion retailer, I’d be thinking about managing my operating costs as well as I can. I’d be carefully thinking about next season’s assortments and looking to next fall to start really benefiting from the hard work on better assortments, maybe managing the supply-chain diversity, diversifying and maintaining those customer relationships. Because when we get out on the other side, consumer spending will resume, but the brands offering the deepest discounts are going to be favored.
Sunny Zheng, Research analyst, Coresight Research
How are fashion retailers being impacted by the strengthening dollar?
The reason why [luxury] brands haven’t reported a decline in gross margin is because of the resiliency of the high-income shoppers. It means they continue to buy more, making those luxury brands outperform more than middle-level and lower-level retailers. Luxury brands don’t always give guidance, so they don’t report how foreign exchange impacts their business. But for the third quarter and the fourth quarter, when the pent-up demand declines, when the market factors in inflation the consumer demand for luxury products will be lower compared to the first half of 2022.
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What can they do to minimize their losses?
Most of the US brands are now controlling costs, especially in marketing and administration like human resource and cutting employees in order to save costs, but I consider it more beneficial to pull the top-line growth. It will be great to grow their DTC business and they could reduce unprofitable wholesale doors in order to save margins. International brands are expanding aggressively in the US by opening physical stores, but my thinking will be to slow the pace of growth, focus on growing e-commerce and to suit consumer needs for products to have the right products to engage more with consumers. It will be great for them to launch loyalty programs, or they can target younger consumers or middle-aged consumers in order to build customer loyalty more tightly instead of doing mass marketing.—JS