- US earnings season
- FX volatility
- FX management
January in the US markets is a ritual. It marks the start of Q4 earnings season. An orchestrated spectacle that sets the tone for companies throughout the year ahead.
The season follows a distinct rhythm. It begins with the Big Banks (JP Morgan, Goldman Sachs, Wells Fargo), setting the macro stage with updates on lending health and consumer resilience. Next, the Industrials (Caterpillar, Honeywell) offers insight into global supply chains. Then, the spotlight shifts to the main event: Big Tech. These are the headlines that drive sentiment and move indices. Finally, the season concludes with the Major Retailers (Walmart, Target, Home Depot), providing the final word on household spending.
It's a well-oiled machine, but also a volatility engine.
When dozens of large-cap stocks report in the same week, liquidity thins. Sector ETFs swing, correlations rise, and investors hedge portfolios or cut exposure, reinforcing volatility. Q4 is particularly potent because US stocks trade on forward earnings, meaning Q4 results provide the foundation for expectations about the year ahead.
The underserved commentary on Q4 Earnings
While markets have learned to accept this orchestrated volatility, there's a more granular source of volatility buried in company statements that receives far less attention: foreign exchange (FX).
Earnings reports bury FX impacts to the footnotes. You'll see phrases like "FX adjusted" or "currency headwinds" with a few percentage points attached. Yet commentary regarding FX strategy or hedging effectiveness is rarely discussed even though those few basis points can translate into millions, even billions, of dollars.
But the FX volatility can be managed with specific forward thinking strategy.
A case study: Levi Strauss & Co. (LEVI) - The hidden cost of operations and a treasury team doing their job right
The recent purchase of a new jean jacket sparked the thought of looking at how Levi Strauss is performing.
The high level: Levi's closed Q4 with sales essentially unchanged from the previous year, but results surpassed Wall Street’s revenue and profit expectations.
In their releases, management attributed performance to ongoing gains in its direct-to-consumer (DTC) channel, progress in expanding its product assortment beyond denim, and continued momentum in international markets.
When specifically detailing impacts of FX, Levi’s management cited "adverse foreign exchange" as the reason for bloated SG&A expenses. The commentary suggested that FX had a negative impact on the companies margins.
But what is interesting is the differing cash reality that appears when you look at the Statement of Cash Flows:
- Realised Gain (Non-Designated Hedges): $24.3 Million
Layman's terms: the treasury team implemented a hedging strategy that actually resulted in a cash inflows recognised under investing activities.
The Disconnect: Levi's ‘adverse FX’ impact on SG&A refers to translation of foreign costs (i.e. rent, salaries, expenses) becoming more expensive in dollar terms, and as a result hitting operating income.
The hedging gains however acts a a financial offset, effectively reimbursing the cash impact. The Treasury team successfully executed a hedging program that reduced the overall volatility impact.
The Takeaway
Without this hedging program, Levi's shareholders would have suffered margin degradation without any cash offset. The company effectively used financial engineering to subsidise operational volatility.
Levi's illustrates the ultimate goal of FX management: you may not always be able to preserve the margin headline (optics), but you can maintain control over the cash position through appropriate treasury management (reality). Without this, the Q4 spectacle for Levi’s could have been a bit uglier.
About Primary
Primary provides modern treasury management solutions for complete cash visibility, idle cash optimisation, and FX risk management - all in one platform.
