A falling Australian dollar is hurting Australian retailers

Credit: AuthenticEccentric

Fashion accessories retailer Lovisa Holdings Ltd (ASX: LOV) today reported that the falling Australian dollar had increased its cost of goods by 15% compared to last year.

The announcement is an ominous warning for many other ASX-listed Australian retailers including the likes of Nick Scali Limited (ASX: NCK), JB Hi-Fi Limited (ASX: JBH), Reject Shop Ltd (ASX: TRS), Myer Holdings Ltd (ASX: MYR), Harvey Norman Holdings Limited (ASX: HVN) and Adairs Limited (ASX: ADH).

Essentially any Australian retailer that is importing a large percentage of goods from offshore is likely to feel the pain. Nick Scali warned at its AGM last year that the continuing decline in the Australian dollar ‘will bring further challenges in maintaining sales and/or margins’. Adairs also warned in November 2015 that foreign exchange spot rates were lower than assumed in the company’s prospectus forecasts.

As the Australian dollar falls against other currencies, goods purchased overseas become more expensive, and while retailers can pass some of the costs onto Australian consumers, they do have to wear some of the costs. Lovisa says that the falling exchange rate meant a 3.5% fall in gross margins with 2.3% of that passed onto customers, but it has still had to take a 1.2% cut.

Some of the pain can be minimised with rolling hedging contracts, but that also comes at a cost – which impacts on margins.

A year ago, the Australian dollar was buying close to 78 US cents, now it’s buying just over 70 US cents, having fallen from above parity with the US dollar in May 2013, as commodity prices began to tank.

Foolish takeaway

We have yet to see what the impact will be on retailers over the past six months, but all the above companies will report their results in the next month, so we’ll know soon enough.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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