Hermès Forecasts Difficult Year For Luxury

Hermés Fall 2016 Shoes On The
Hermés RTW fall '16 runway collection.
Giovanni Giannoni/Fairchild.

Hermès is hoping continued demand for its Birkin Bags and Collier de Chien bracelets will help it to jump over obstacles in 2016.

Axel Dumas, chief executive officer of Hermès International, predicted that 2016 would be a difficult year for luxury, citing hurdles including stock market volatility in China, the strong U.S. dollar and a spate of terrorist attacks, including the suicide bombings in Brussels on Tuesday that killed 31 people and injured 260.

“I think the fundamentals of the group are very strong, the creativity of the house is good and therefore we are approaching 2016 with enthusiasm,” he told a news conference at Hermès headquarters in Paris, after the company published full-year results on Wednesday.

“Having said that, one should not be in denial. The macroeconomic environment remains very complex globally. That’s why we have to be careful not to fall into hubris and immoderation and say everything is fine and easy, just because we’re called Hermès,” he added.

Citing a heavier tax burden, the company reported net earnings rose 13.2 percent last year to 973 million euros, or $1.08 billion.

The French luxury firm trumpeted that its operating margin improved 0.3 percent to 31.8 percent of sales, despite being diluted by currency fluctuations. Operating profits climbed 18.6 percent to 1.54 billion euros, or $1.71 billion.

“It’s a good year for Hermès, I would even say a record year,” commented Dumas.

But Hermès also reiterated its dim outlook.

Last month, it warned that 2016 sales growth could be below its medium-term revenue goal of 8 percent at constant exchange rates, citing “economic, geopolitical and monetary uncertainties around the world.”

Dumas explained that one reason for the more cautious prediction was that Hermès has decided this year not to pass on cost increases to consumers outside the euro zone in order to mitigate price differentials linked to currency fluctuations.

Prices are set to rise by 3 percent to 4 percent in Europe, meaning the company’s average prices will increase by only 1.5 percent in 2016, which was likely to impact its overall growth prospects and margins, he added.

The downgrade came even as Hermès reported a 14.5 percent bump in fourth-quarter revenues, as reported, reflecting buoyancy in all regions and despite a drop in sales of silk and textile items in the wake of the Nov. 13 terror attacks in France.

Sales reached 4.8 billion euros, or $5.4 billion, in 2015 as a whole, up 17.5 percent year-on-year. Stripping out the impact of currency fluctuations, the gain stood at 8.1 percent. All dollar figures are converted from euros at average exchange rates for the period in question.

At constant exchange rates, sales advanced 18.3 percent in Japan; 10.8 percent in Europe, excluding France; 6.8 percent in the Americas; 5.1 percent in Asia-Pacific, excluding Japan, and 6.2 percent in France.

Dumas said European sales had not benefited by as much as expected from the weakness of the euro, as the Nov. 13 terrorist attacks in Paris caused tourists to stay away from the region.

“The level of tourism in France has not yet returned to the levels we had before,” he said, noting that other European cities such as London and Milan were on the path to recovery. He added it was too early to evaluate the impact of the Brussels attacks.

By product category, sales gained 12.6 percent in leather goods and saddlery; 7.8 percent in ready-to-wear and fashion accessories; 3.3 percent in perfumes; 8.5 percent in other sectors, and 0.1 percent in watches. They fell 0.5 percent in silk and textiles.

“I don’t expect a terrific year for silk in 2016,” said Dumas.

However, he forecast the continued expansion of its production capacities would guarantee sustained revenues from leather goods. Dumas underlined that Hermès hired 500 people in 2015, of which 400 are in France, mainly in production. The company will inaugurate its new facility in Héricourt is eastern France in two weeks.

“There continues to be very strong demand for our products in leather goods and saddlery regardless of the economy, and in more difficult years, this segment clearly acts as a locomotive,” he remarked.

In 2016, Hermès is returning to its saddle-making roots with the theme Nature at Full Gallop. Dumas noted that Simon Delestre, currently the world’s highest ranked rider on the Longines Ranking, uses an Hermès saddle.

“The horse was our first and only client for 100 years,” noted the executive. “I have no doubt that 2016 will be challenging, but don’t forget that horses – unlike automobiles – do not skirt obstacles but jump over them, and even take pleasure in performing a tidy jump.”

Hermès is banking on a rise in online sales and has charged Charlotte David, its recently appointed communications director, and Wilfried Guerrand, executive vice president in charge of Hermès Woman and digital projects, with revamping its Web site. The new version should be ready by late 2016 or early 2017, Dumas said.

“I have great confidence in the capacity of our digital numbers to increase. In fact, I would say it’s a non-choice,” he said. “We have to go into digital because the 20-year-olds of today are our future customers and they are totally connected.”

Dumas declined to provide projections, but forecast that in 10 to 15 years, all sales would involve a digital component. “I have great ambitions, both in terms of sales and communication,” he said of the future site.

Hermès expects to invest in the region of 300 million euros, or $327 million at current exchange, in 2016.

The luxury house will open four stores this year in Rio de Janeiro, Hong Kong airport, Chongqing in China and Macao. It plans to renovate around 15 stores, including flagships in Rome, at the Ala Moana Center in Hawaii and at Liat Towers in Singapore.

The firm will propose a dividend of 3.35 euros, or $3.66, per share in 2016, up from 2.95 euros, or $3.27, the previous year. Hermes shareholders also received an extraordinary dividend of 5 euros, or $5.55, in 2015.