Hermès Profits Increase 24.6% in 2012

Luxury firm says operating margin rose to 32.1 percent of sales, a record level.

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PARIS — Luxury, you’ve come a long way, baby.

This story first appeared in the March 22, 2013 issue of WWD.  Subscribe Today.

Signaling the sector’s impressive profitability even in the face of a topsy-turvy global economy, Hermès International said Thursday that its operating margin widened 1 point to 32.1 percent last year, the highest since the company went public in 1993.

What’s more, sales trends since the beginning of the year “continue to be good,” chief executive officer Patrick Thomas said, as Hermès reported a 24.6 percent increase in net profits to 740 million euros, or $951.5 million, versus 594 million euros, or $827.1 million, in the year-ago period.

Thomas noted that the operating margin stood at around 14 percent back in the early Nineties.

(By comparison, the 2012 operating margin at LVMH Moët Hennessy Louis Vuitton was 21 percent, and 18.4 percent for PPR.)

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Speaking at a press conference here appointed with Arne Jacobsen chairs, Thomas cautioned that profitability this year is likely to be inferior to 2012, given a reversal in a favorable currency situation last year that added 178 million euros, or $228.9 million, to coffers.

“I continue to be prudent,” said Thomas. “There are too many unpredictable factors that could impact the business this year.”

These include spiraling raw material costs, with cashmere prices, for example, jumping some 50 percent in the past three years.

The executive gave no precise sales or earnings guidance beyond the company’s long-term forecast of 10 percent annual sales growth, including for 2013.

Still, he said demand remains robust for leather goods, silk scarves and perfumes, particularly in China, where Hermès is outperforming its peers.

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Sales last year rose 22.6 percent to 3.48 billion euros, or $4.48 billion. Stripping out currency fluctuations, sales were up 16.4 percent. While some of its luxury competitors had reported flagging demand in China, Hermès said sales in Greater China rose 34 percent in the fourth quarter and were up 28 percent in 2012 as a whole.

Asked to account for its success on the market, Thomas said the company’s communications efforts had burnished its image in China and that the brand’s strong masculine offering — unusual among top Europe’s top luxury players — has served it well in a region where men are making the lion’s share of purchases for themselves.

The weight of the leather goods category is less in China than in other markets, with men’s ready-to-wear, watches, fashion accessories and silks driving sales, Thomas said.

Asked to quantify the importance of China, he said Mainland China accounts for about 10 percent of the business, Greater China 20 percent and Chinese clients worldwide about 30 percent.

He noted that the importance of this nationality is still inferior to Japan at its peak, when the island nation generated about a third of Hermès’ total sales, not including sales to Japanese nationals elsewhere.

Operating profits for the 12 months ended Dec. 31 rose 26.4 percent to 1.12 billion euros, or $1.44 billion, versus 885 million euros, or $1.23 billion, in 2011.

Dollar figures are converted from euros at average exchange rates for the periods in question.

The company said it would propose a per-share dividend of 2.50 euros, or $3.24 at current exchange, at its general meeting on June 4. An interim dividend of 1.50 euros, or $1.94, was already paid out on March 1.

The firm invested 370 million euros, or $475.7 million, last year, primarily to burnish the store network and production capacity. Hermès opened two new branches; renovated or enlarged a dozen other boutiques, and purchased the property for its unit in Beverly Hills for about 70 million euros, or $90 million.

Hermès said it would open or renovate 15 locations this year, and continue to recruit and train artisans for its 12 leather goods ateliers in France.

Asked about legal proceedings against LVMH, which owns 22.6 percent of Hermès’ share capital, Thomas held out hope that its luxury rival and unwelcome shareholder would reduce its stake.

He said the criminal complaint Hermès launched last year, now in the hands of an investigating magistrate, reflects the fact that the company has moved from a defensive posture to an “offensive” one in the battle. He noted the magistrate has a broader geographical scope, extending into Panama and Luxembourg, than an investigation by French stock market regulator AMF to determine if LVMH respected market rules in amassing its stake.

Hermès is accusing the world’s largest luxury conglomerate of insider trading, collusion and manipulating stock prices to amass a chunk of its share capital via cash-settled equity swaps. LVMH in turn filed a suit against Hermès for “slander, blackmail and unfair competition.”

During a question-and-answer session, Thomas bristled at the suggestion Hermès had trimmed its travel retail network at the behest of LVMH kingpin Bernard Arnault, who once suggested that channel is not suitable for high luxury.

“We are proud of our travel stores,” he said, noting that Hermès has closed a few small locations, pursuing larger installations — as at the Singapore airport, for example — to showcase a better array of products.

Shares in Hermès closed up 1.21 percent on the Paris Bourse to close at 260.10 euros, or $335.66 at current exchange.

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