Hermès Bucks Luxury Downturn As Sales Rise 6.2%

Hermes Men's Spring 2017 Collection
Hermes men's spring '17 collection on the runway at Paris Men's Fashion Week.
Rex

PARIS — It seems there is no bad time to buy a Hermès handbag.

The French luxury firm bucked market turmoil in the second quarter, recording a pick-up in sales driven by solid momentum in Japan, France and the Americas. The better-than-expected results drove Hermès shares up 4.6 percent to close at 370.25 euros, or $407.57 at current exchange, on the Paris Stock Exchange.

“In a more adverse context, growth was driven by the success of leather goods and saddlery which confirmed its role as the mainstay of the group,” Hermès said of its first-half performance.

Bridget
1 year
It is understandable as Hermes's bagsare better investments than gold. That and they're stunning.

The company published the results on the same day it was due to host an event in Paris celebrating its 2016 theme, “Nature at Full Gallop,” which highlights its saddle-making roots.

The maker of Birkin bags and silk squares registered a 6.2 percent revenue gain in the second quarter to 1.25 billion euros, or $1.39 billion at average exchange rates for the period in question. At constant exchange rates, the improvement stood at 8.1 percent, versus consensus expectations of 5.6 percent.

This compared with growth of 6.2 percent at constant exchange rates in the first quarter. Currency fluctuations dented revenues by 25 million euros, or $27.9 million, in the first six months of the year, Hermès said.

The luxury firm maintained its cautious outlook for the full year, reiterating that sales growth in 2016 could be below its medium-term goal of 8 percent at constant exchange rates due to “the economic, geopolitical and monetary uncertainties around the world.”

On that basis, sales grew 7.2 percent in the first half, down from 8.8 percent during the same period a year earlier.

However, Hermès expects operating profitability in the first half to be around one point above the 32.5 percent recorded in the first six months of 2015, thanks to the positive impact of foreign exchange hedging contracted last year. It is scheduled to publish first-half results on Sept. 14.

France proved resilient in the second quarter, despite the ongoing impact of terrorist attacks on tourism flows, posting revenue growth of 8.9 percent at constant exchange rates thanks to a solid local customer base.

The Americas gained 12.1 percent, while Japan recorded a 7.3 percent increase. Revenues were up 6.7 percent in both Europe excluding France, and Asia Pacific excluding Japan.

Sales of leather goods and saddlery rose 15.2 percent in reported terms, driven by Birkin and Kelly handbags, but also lesser-known models such as the Constance, Halzan and Lindy. Hermès has been increasing output to meet demand for its bags, which often generate months-long waiting lists.

The performance was “remarkable given the difficult luxury backdrop,” according to Rogerio Fujimori, luxury analyst at RBC Capital Markets. “The biggest and most profitable luxury goods division saved the day again with another outstanding quarter,” he said in a research note.

However, sales of ready-to-wear and accessories fell 3.9 percent, while silk and textiles continued to struggle, with a 6.5 percent decline in the second quarter.

Sales of perfumes rose 11 percent thanks to ongoing demand for its Terre d’Hermès men’s fragrance and the launch of colognes Eau de néroli doré and Eau de rhubarbe écarlate. Watch sales rose 2.1 percent, but the other Hermès sectors group — which includes jewelry and home products — was down 3 percent.

Axel Dumas, chief executive officer of Hermès, in March 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, which have caused tourists to stay away from Europe.

Dumas added 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. This was likely to impact its overall growth prospects and margins, he noted.

The global luxury market is expected to grow up to 2 percent at constant exchange rates in 2016, replicating the performance of 2015, according to the latest estimates from Bain & Co. and Fondazione Altagamma.

Burberry reported earlier this month that retail sales in its fiscal first quarter, ended June 30, were flat on an underlying basis and 4 percent higher than the corresponding three-month period last year, due to the weaker pound. Like-for-like sales were down 3 percent.

LVMH is due to report its first-half results on July 26, with Kering to follow on July 28.