By  on February 9, 2007

PARIS — Robust sales of perfumes, silk scarves and leather handbags drove solid holiday business at Hermès International, propelling fourth-quarter sales up 6 percent to 463.3 million euros, or $597.5 million.

Stripping out the impact of currency, the increase stood at 9.9 percent, besting some analysts' expectations. Currency conversions were made at average exchange rates for the period.

While its overall pace trailed the double-digit gains logged by many of its luxury peers, the French firm trumpeted increases across all its product categories and cited good momentum in most regions except Japan, which is hampered by a "rather unfavorable environment," said Patrick Thomas, chief executive officer of Hermès.

"We are very much within our forecast," Thomas told WWD. "For 2007, our expectation is a growth rate between 8 and 10 percent, with real ambitions to be at 10 percent."

Underscoring his confidence is strong growth in Europe, China and the U.S., where in the first half Hermès will open a unit in Charlotte, N.C., and a major flagship on Wall Street in New York. "There is a strong evolution of the American customer towards quality, and the ready-to-wear is also selling very well," he said. "We expect a good 2007 in the States."

In China, Hermès plans to open four stores this year, bringing its complement to 13. In total, the company plans to renovate more than 20 stores this year.

By region, constant-currency sales rose by 8.5 percent in France, 12.5 percent in the rest of Europe, 9.6 percent in the Americas, 8.9 percent in Asia-Pacific and 6.3 percent in Japan.

"The challenge is Japan," Thomas noted, attributing slow growth there to "a little bit of indigestion with luxury goods" and prices that have jumped 50 percent over the last five years, due primarily to yen weakness. "We have to be very pragmatic."

Still, one analyst cheered its results in Japan. In a research note for Merrill Lynch, Antoine Colonna noted the company's 5 percent constant-currency increase in Japan for the full year "highlights, in our view, the strength of the brand even in its most mature markets."By product category, perfumes posted the biggest surge in the quarter, up 39.3 percent at constant exchange to 29 million euros, or $37.4 million, thanks primarily to the success of the new men's scent, Terre d'Hermès.

Watch sales accelerated in the quarter, up 21.4 percent at constant exchange to 38.8 million euros, or $50 million, while tableware improved 25 percent to 14.9 million euros, or $19.2 million.

Goldman Sachs analyst Jacques-Franck Dossin noted the better-than-expected watch results "bode well for margins."

At constant exchange rates, sales rose 14.9 percent for silks and textiles, 5.6 percent for rtw and fashion accessories and 4.5 percent for leather goods. Hermès noted that strong demand for small leather goods and leather bags offset the loss of sales due to a discontinued range of canvas bags seen as a threat to its tony image. That cancellation dented group sales by 2.6 percent, according to calculations by HSBC analysts Antoine Belge and Erwan Rambourg.

In addition to its perennially popular Kelly and Birkin bags, the company cited strong demand for newer styles such as the Paris-Bombay, the Lindy and the so-called "flat Birkin," in addition to small leather goods.

Thomas attributed the rebound in silk sales to cyclical trends and a burst of creative and colorful designs under artistic director Bali Barrett.

By contrast, rtw sales disappointed, declining "slightly" last year, Thomas said. He blamed the slip on logistics problems and late deliveries, not deficiencies in collections by the house's designers, Jean Paul Gaultier and Véronique Nichanian, who head women's and men's rtw, respectively.

Thomas characterized 2006 as a "year of transition," given the retirement of its charismatic artistic director and ceo, Jean-Louis Dumas, and the passing of the artistic reins to his son, Pierre-Alexis Dumas, and his niece, Pascale Mussard.

Meanwhile, the HSBC analysts said uncertainties in Japan account for Hermès' wide sales targets, and "the conference call confirmed our view that earnings growth is unlikely to accelerate in 2007, and would remain below that of most peers."

On the positive side, management reiterated the family's commitment to keeping the firm independent and told analysts Hermès is not aware of any investor having accumulated more than a 0.5 percent stake.For the full year, Hermès sales rose 6.1 percent to 1.52 billion euros, or $1.95 billion, from 1.43 billion euros, or $1.79 billion, a year ago.

Expressed at constant exchange rates, the increase was 7.8 percent. Leather goods accounted for 44 percent of revenues; rtw and fashion accessories, 19 percent, and silks and textiles, 11 percent.

Hermès reports profits on March 22. Shares of the firm rose 2 percent to close at 94.85 euros, or $119.47, on the Paris Bourse.

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