Hermès Raises Profit Outlook

Hermès beat its full-year target with an 8.5 percent sales increase in 2009.

PARIS — Hermès International said its clients splurged in the run-up to Christmas, helping it beat its full-year target with an 8.5 percent sales increase in 2009.

This story first appeared in the February 8, 2010 issue of WWD.  Subscribe Today.

As a result, the company raised its forecast for operating profit to an increase of 3 to 4 percent, versus an earlier forecast of a 5 percent drop. Hermès will publish its full-year results, including profits, on March 25.

“We knew there would be a gradual improvement over the course of the year, but the strength of the recovery in the fourth quarter surprised us a little,” chief executive officer Patrick Thomas told WWD. “Net profit should be roughly stable — it means that Hermès is solid.”

The group reported fourth-quarter sales of 587.3 million euros, or $864.3 million, versus 540.9 million euros, or $729.4 million, in the same period the previous year. This represented a rise of 8.6 percent on a reported basis and 11 percent at constant exchange rates. Dollar figures are calculated at average exchange rates for the periods in question.

Growth was healthy across most regions, with France and the Americas exceeding market expectations, rising 7.8 percent and 19.5 percent, respectively, at comparable exchange rates. China remained the key driver of growth in the Asia-Pacific region, excluding Japan. The area saw sales rise 35.1 percent during the last three months of the year.

Hermès is banking on Asia for future growth, as evidenced by its recent decision to take a majority stake in a new Shanghai-based company, Shang Xia, which will create, manufacture and sell clothes, accessories and lifestyle objects made using Chinese raw materials and know-how. Despite recent weakness, the luxury brand also remains committed to Japan, still its number-one market with a 21 percent share of sales in 2009.

Hermès reported full-year sales of 1.91 billion euros, or $2.67 billion, versus 1.76 billion euros, or $2.59 billion, in 2008 — a rise of 8.5 percent on a reported basis and 4.1 percent at constant exchange rates. Hermès had fixed a target of flat sales at constant exchange rates.

Thomas was cautious about prospects for 2010, noting currency markets had been spooked by the prospect of Greece defaulting on its public debt. He predicted the issue of spiraling budget deficits, many deepened by government measures to stave off the global financial crisis, would continue to weigh on morale. “I think 2010 will be lackluster,” he said. “The fear is — and you always have to prepare for the worst — that for our sector, the real crisis will be felt once governments have to finance their deficits. I strongly fear this could happen in 2011 and 2012.”

Antoine Belge, an analyst at HSBC, said the company, in a conference call with analysts, provided a target of 5 percent organic sales growth in 2010, with increases of around 5 percent in the U.S. and Europe, double-digit growth in Asia and a slight decline in Japan.

The analyst deemed the outlook “conservative” and said HSBC was banking instead on an overall rise of 6 percent. Belge noted Hermès would benefit this year from favorable foreign exchange hedging rates, which should boost operating profit growth.

Thomas declined to estimate the impact of foreign exchange variations on the 2009 results, but welcomed the recent easing of the euro, which hit an eight-month low against the dollar in European trading Friday. “The dollar recovered in 2009, which means that we will have very few price increases in 2010, namely in our foreign currency markets. That is rather favorable for our business,” he said.

Thomas noted that while sales in the company’s own stores progressed in 2009, its wholesale business suffered as distributors slashed inventories in the face of a sharp drop in demand. Sales in Hermès stores were up 17 percent year-on-year on a reported basis and 12 percent at comparable exchange rates, while wholesale revenues dropped 17 percent at constant exchange rates.

The luxury firm plans to open 12 stores in 2010, including a new unit on Rue de Sèvres in Paris and its first dedicated men’s store on Madison Avenue in New York, slated to open Tuesday. Thomas said four stores would open in China — in Shanghai, Harbin, Nanjing and Suzhou — in addition to four in Japan, one in Brisbane, Australia, and one in the Marina Bay area of Singapore.