The continuing strength of the Australian dollar and Swiss franc (actually it’s more the continuing weakness of the US dollar) will have an impact on earnings of two of the country’s faster growing stocks, JB HI-Fi and CSL Ltd.
Both held their 2010 AGMs yesterday, both had relatively good news on the outlook, both meetings also heard that the dollar’s value is a big factor at the moment in crimping sales growth and profits.
CSL shareholders were told that a combination of the higher Australian dollar and stronger Swiss franc could strip up to $100 million from CSL’s 2010-11 earnings if currency values at October 8 were to last for much of the next 12 months.
Addressing shareholders at the annual meeting in Melbourne chairman Elizabeth Alexander said the company was anticipating a net profit of $980 million to $1.03 billion this year at last year’s exchange rates.
However if currency rates this week were to apply for the balance of the financial year then CSL’s net profit would slip to $880 million to $940 million.
The company earned a net profit in 2010 of $1,053 million This result included an unfavourable foreign exchange impact of $187 million.
If the dollar maintains its present value over the rest of 2010-2011, then CSL earnings would be down as much as $183 million, or around the fall in the 2010 year from the impact of higher currencies (and the lower value of the greenback).
If values were to fall to around the level in the 2009 financial year, then the impact of CSL’s profits in 2009 and 2010 from the rise in the value of the Aussie dollar and the Swiss franc would be over $360 million, which is quite a substantial amount.
Speaking after the annual meeting, CEO Dr Brian McNamee told reporters the potential currency impact of $100 million to CSL’s profits was roughly 70% related to the higher Australian dollar and 30% to the higher Swiss franc.
Dr McNamee said he did not see the value of the Australian dollar changing for a while.
CSL shares rose 30c yesterday to a day’s high of $32.50, before being sold off in the afternoon and closing up 7c at $32.27.
Over at the JB Hi-Fi AGM, shareholders heard forecasts of an upbeat Christmas period, but there was a sting in the address.
That was, sales early in the first half of the current financial year had been weaker than expected (as mentioned in the outlook comment with the 2010 financial figures), but this shortfall had now been made up.
JB Hi-Fi said sales have continued to improve, but remain 5% below target.
But the consumer electricals retailer still sees a strong festive trading season.
JB Hi Fi shares ended down 15c at $20.10, a small rebound after being lower during the day’s trading.
Chief executive Terry Smart told the AGM that the group had experienced a steady rise in sales since June 2010.
"As a result, we now have positive comparable growth year to date for FY11," Mr Smart told the AGM.
"Total company sales for the first quarter FY11 are up 12.2 per cent on the same period last year, however behind budget by approximately 5 per cent."
Mr Smart said the retailer had forecast a lift in store sales as the holiday season trade approached.
"The company expects to make up part of this shortfall in the second half, which is cycling less challenging comparable store sales.
"The overall strength of the economy, low levels of unemployment and a strong product assortment should underpin a successful Christmas trading period."
Discounting had been a main feature in the retail environment during the previous year, due to soft consumer demand, Mr Smart said.
"We are expecting to see discounting to continue through Christmas 2010, however JB is well-positioned to maintain margins, given its increasing scale, broad product assortment and everyday low prices strategy," he said.
The stronger dollar is both helping and hindering retailers like JB Hi-Fi. It’s helping by cutting the cost of imports, but the dollar’s value has risen so quickly in the past couple of months that retailers can’t keep up.
Because sales are subdued, retailers can’t shift the higher-priced stocks (bought when the dollar was cheaper), so this is compressing profit margins, especially on flat screen TVs and other higher priced products.
Judging by the comments from the CEO, JB Hi-Fi might finish the December half with sales lower than expected, and possibly earnings as well
Chairman Pat Elliot told the AGM that the company has put off any capital management plans until early 2011.
"As reported previously, the Company has moved from being a net investor of cash to a net generator of cash. At year end we had a conservative net debt position of $17.9 million.
"The company has been assessing its capital structure to ascertain the right balance between financial risk and efficient capital usage.
"Given the current headwinds of increasing interest rates and softer than expected consumer spending we believe that further consideration of any material capital management initiatives is best deferred until after the important 2010 Chris
