As I’ve noted in outlining the thesis for companies that are most materially over-earning (including WRC, VFC, SKX, GES, COLM, ADS.DE, and others…) the key factor that will emerge is what the companies have been doing with the FX benefit. Reinvesting in their own business to build a better base for when FX goes south? Or printing on the P&L in the form of higher margins?
This will be a period that separates the winners – like RL, TBL, LIZ, and NKE, from the losers noted above.
Aside from my view that supply chain pressure will intensify meaningfully on the P&L by holiday, now we can add on the impact companies being exposed for aggressive and irresponsible FX strategies as well. Remember that 80% of the companies in this space (as they exist today) have not lived through a down FX cycle. Rarely is the first crack at managing FX pleasant.
Volatility is going up in this space, folks. The dispersion in cash flow trajectory between winners and losers will be massive. (Check out our prior post where Casey outlines how the consensus does not yet ‘get it’).
We’re going to be all over capturing that opportunity for clients here at Research Edge.