Hermès Net Profits Rose 11% in 2017, Prepares for Digital Push into China

Hermès International confirmed its goal for revenue growth at constant exchange rates in the medium term, despite growing economic, geopolitical and monetary uncertainties worldwide.

The maker of Birkin bags and silk scarves said on Wednesday net profits climbed 11 percent last year to 1.22 billion euros ($1.5 billion), up from 1.1 billion euros in 2016.

The French luxury firm trumpeted that its operating margin improved 2 points to 34.6 percent of sales — an all-time high — driven mainly by the success of the collections, high level of productivity at the production sites and positive impact of foreign exchange hedges from 2016.

Recurring operating income rose 13 percent to 1.92 billion euros in the period.

Bolstered by growth in all geographical areas, company revenues totaled 5.55 billion euros, representing a rise of 6.7 percent versus 5.2 billion euros in 2016. At constant exchange, revenues gained 8.6 percent.

The earnings slightly beat expectations, Luca Solca, managing director at Exane BNP Paribas, said in a client note.

In January, Hermès opened a new 10,000-square-foot store in Hong Kong, plus for spring ’19, the house plans to open a three-level, 10,000-square-foot unit at 46-48 Gansevoort St. in the Meatpacking District of New York. Once the new Soho and Meatpacking units open, Hermès’ will have six Manhattan stores, an unusual expansion at a time when many other retailers are shuttering stores and downsizing.

The maison has also launched a new digital platform in Canada and the United States. Staggered European launches will follow in the first semester of 2018. It will launch in China by the end of the year.

With its “mobile-first” dimension, it’s also a point of entry for broadening the brand’s reach, with 75 percent of clients ordering from the site new. It has no marketing or merchandising department but instead allows store directors to tailor collections to their respective local markets, set out to do “something original,” mixing e-commerce with communication, for its online flagship.

“You can shop or watch a seven-minute film, which tests limits of concentration in the digital world,” said chief executive officer Axel Dumas of the new site.

Chinese consumers account for one in three luxury purchases globally, and are also at the forefront of digital development, reflected by the demise of physical retail formats such as hypermarkets, the broad acceptance of digital payment solutions and the high e-commerce penetration in fast-moving consumer goods.

Digital payment penetration in China is 50-times higher than in the U.S., which still relies largely on plastic, Exane noted in its recent report “China Online Boom:…Yet to Come for Ostrich Luxury Brands.”

“The Chinese have been super quick in recognizing true quality and craftsmanship, and are moving to new houses; our sales there are exceptional,” said Dumas, who cautioned against forming preconceptions around Millennials. “If you look at China, it’s a young market. Only these Chinese Millennials are very wealthy. They’re the ones buying the expensive ready-to-wear and the bags, so it’s important not to impose a Western vision of things,” Dumas said.

“I was with Florian Craen [Hermès’ vice president of sales and distribution] at one of the China stores, and this young man comes in and says, ‘I can’t afford to buy that, but I will be back soon, and I will buy it,’” recounted Dumas, adding: “I’m not sure there are many Western Millennials with these kinds of budgets.

For 2018, Hermès celebrates the theme “It’s your turn to play.” This is a reminder of the importance of fun to spur creativity and innovation.

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