By  on November 9, 2010

PARIS — Hermès International said Tuesday that it’s headed for a record year — and prepared to fend off Bernard Arnault’s unwelcome arrival.

“The house is on course for its best performance in at least 10 years,” chief executive officer Patrick Thomas said in a conference call as Hermès registered a 30 percent increase in sales in the third quarter, fueled by strong demand for silk scarves, leather bags and watches, particularly in Asia. “It may even be the best ever, full stop.”

Thomas said the company’s strategy was unaffected by LVMH Moët Hennessy Louis Vuitton’s recent purchase of 17.1 percent of its shares, adding that the family shareholders were studying possible responses to the unwelcome move.

“LVMH’s intrusion into the capital of the house will do nothing to change the vision and the philosophy of the Hermès family, which has developed this little jewel over six generations to turn it into what it is today,” he said.

Thomas applauded the decision by the French market regulator to launch a probe into LVMH’s share purchase. Under local law, companies must declare stock purchases when they exceed 5 percent of the share capital, but cash-settled equity swaps — the instrument used by LVMH to launch its coup — are excluded from this.

He declined to detail what steps the family shareholders, who owned some 73 percent of the share capital as of Oct. 28, may take to counter the arrival of LVMH chairman and ceo Bernard Arnault in their midst. Options reportedly include grouping family shares into a non-listed holding.

“We have the general assembly’s permissions to launch a certain number of defense operations,” said Thomas. “It is perfectly logical that, having found a visitor in its garden, [the family] should gather and discuss ways of dealing with this visitor.”

The chief executive said the three family branches — Dumas, Puech and Guerrand — were “extremely serene” and confident that the company’s structure as a limited partnership was strong enough to protect it from a potential hostile takeover without the need for so-called “poison pills.”

“The fact that the Hermès family is the active partner of the house of Hermès and that it currently holds a little more than 73 percent of the group’s capital is not a poison pill, it’s a pill, full stop. There is no need for poison. It’s powerful, it’s enough,” he said.

Thomas waved off a questioner who suggested that Compagnie Financière Richemont had acquired a stake of less than 5 percent of Hermès shares. Officials at Richemont were not available to comment on the rumors.

Even as the battle with Arnault rages on, the luxury group continues its strong growth. Hermès raised guidance for the second time this year, saying it now expects sales to grow 15 percent at constant exchange rates in 2010, versus an earlier forecast of a 10 to 12 percent increase.

The French luxury firm also reiterated that it expected the current operating margin to improve by 1 to 2 percentage points from 24.2 percent in 2009, and revealed that it has already started reinvesting some of the margin increase into boosting its media spend.

Revenues at Hermès totaled 590.1 million euros, or $761.3 million, in the three months ended Sept. 30, versus 452.1 million euros, or $646.1 million, in the year-ago period. Dollar figures are converted from euros at average exchange rates for the periods to which they refer.

Sales in the company’s own stores rose 30.5 percent, driven by silk and textiles, up 38 percent, and leather goods and saddlery, up 32.2 percent. Sales in the wholesale channel rose 30.9 percent during the period, helped by a 47 percent gain in watches and a recovery in the duty-free channel.

Thomas noted sales of leather goods were boosted by the success of more recent lines, including the leather Garden Party tote and the latest version of the Jypsière, which have become bestsellers.

As a result, the company was facing some supply constraints, but plans to adjust its production capacities in line with a forecast increase in sales of leather goods of 10 percent per year in volume terms, he added.

Revenues in the Asia Pacific region, excluding Japan, jumped 51.7 percent in reported terms in the third quarter. In Europe, excluding France, they rose 22 percent, while France posted a 26.1 percent increase. The Americas saw sales rise 31.1 percent.

Thomas estimated that customers from Greater China now account for more than 25 percent of the company’s global turnover, between domestic purchases and items they buy on vacation overseas.

Moreover, Japan saw a turnaround in the third quarter, with sales up 21 percent in reported terms and up 0.4 percent when stripped of currency effects.

“Hermès in Japan is clearly outperforming the majority of its sector peers,” he said. “We therefore think that although Japan is unlikely to post double-digit growth in the coming years, the slump that it has experienced in the last two years may be behind us and we can expect more or less stable or slightly better sales growth going forward.”

The company said it did not buy back any shares during the first nine months of 2010, other than shares traded under the liquidity contract.

Hermès expects to invest a total of 166 million euros, or $231.7 million at current exchange rates, in 2010. This includes 79 million euros, or $110.3 million, destined toward its retail network, including a new Paris store on the Left Bank, scheduled to open later this month.

The company will invest 26 million euros, or $36.3 million, into its production facilities and 18 million euros, or $25.1 million, into enlarging its center in Pantin on the outskirts of Paris to turn it into a hub for all the house’s craftspeople.

Thomas said the ad spend should total 127 million euros, or $177.3 million, in 2010, representing an increase of 34 percent at constant exchange rates compared with 2009.

Shares in Hermès International closed up 7.6 percent at 166.05 euros, or $231.76, on the Paris stock exchange on Tuesday.

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