By  on July 26, 2007

PARIS — Crunched by the high value of the euro and tepid business in Japan, Hermès International on Wednesday revised full-year revenue forecasts as it reported sales in the second quarter rose a weaker-than-expected 4.7 percent.

The luxury fashion and accessories house said full-year sales would gain 8 to 8.5 percent, in the low range of its previous forecast, due to the "slowdown in Japan."

The company also said unfavorable currency exchange trends would weigh on the year's operating and net income, which it said would not surpass levels attained in 2006.

In the three months through June, sales reached 355 million euros, or $478.6 million, from 339 million euros, or $425.9 million, a year ago, slightly below analysts' consensus expectations. Currency conversions were made at average exchange rates for the respective periods.

Mireille Maury, the firm's managing director of finance and administration, said momentum improved in the second quarter as sales of silk scarves and ready-to-wear quickened. But she admitted the strong euro was a concern.

"Sales trends in the second quarter were good," said Maury. "The euro hurt."

The value of the euro may become a concern for other luxury firms, according to European analysts. (LVMH Moet Hennessy Louis Vuitton and PPR, the parent of Italy's Gucci, both report figures today.)

In a note to investors on Wednesday, HSBC luxury analyst Antoine Belge warned that many European firms' hedging positions were fading in the face of the appreciating euro, which has soared to record values against the dollar this month. The dollar hit an all-time low against the euro on Tuesday, but in early trading in Europe Wednesday rebounded to trade at $1.3778.

"[The euro's strength] is one of the reasons behind our neutral stance on the luxury sector," said Belge.

Through the half, Maury said Hermès' sales gained 10 percent at constant currency exchange rates. After currency translations, though, that figure retreated to 2.9 percent.

Maury said sales in Japan, the company's single largest market, improved "slightly" in the second quarter after a weak beginning to the year. Before the impact of currency fluctuations, sales in Japan rose 5 percent. But after currency translations, sales fell close to 7 percent, to 82.5 million euros, or $111.2 million, from 88.7 million euros, or $111.4 million, last year."We're confident for the second half [in Japan]," said Maury. "Sales [before being translated from the yen] should grow 4 to 5 percent."

Elsewhere, constant currency sales in the quarter gained 12.2 percent in Europe, 14.4 percent in Asia-Pacific excluding Japan, and 8.4 percent in the Americas.

Growth in the Americas shrank to 1.5 percent after exchange differences. Sales in Asia-Pacific grew only 8.9 percent after currency translations.

"The second quarter was better [than the first]," said Maury. "All product categories performed well. In Hermès stores, sales in the half grew 15 percent."

Silk sales led the improvement, bounding 20.3 percent. Sales of rtw grew 15.5 percent and leather goods sales, Hermès' biggest revenue generator, advanced 5.3 percent before the impact of currency. Leather goods sales, however, decreased 0.8 percent after currency exchange rates were factored in. Watch sales fell 2.4 percent, also due to adverse currency exchange rates.

Hermès shares dropped 3.6 percent to close at 75.32 euros, or $103.94 at current exchange, in trading on the Paris Bourse.

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