PARIS--As he reviewed his company's achievements of the past year and discussed some plans for the one ahead, Jean-Louis Dumas dispensed some old fashioned, fatherly advice: Know thyself. Honor your family. Don't spend more than you earn.Those sound like fine words to live by, but they're also the keys to success at high-flying Hermes International, according to chairman Dumas."We have our way," Dumas said after the recent Hermes annual shareholders' meeting here, where the audience at the Marigny Theater hung on his every word and applauded frequently.Indeed, they had little to complain about. While most luxury groups saw profits dwindle and sales momentum stall last year in the wake of Sept. 11 and a difficult economic climate, Hermes galloped ahead. Net income shot up 15 percent to $177.5 million on a sales rise of 6 percent to $1.1 billion, as reported. Sales in the first quarter of this year were up 6.8 percent and Dumas said he expects the pace to continue.A charismatic executive with a gentle manner, Dumas is reluctant to talk about his competitors. He behaves like the racehorse that is the sometime-symbol of Hermes: he looks straight ahead of him, not at those around him.But to listen to him talk in his colorful way, variously quoting scripture and culling wisdom from his family lore, is to construct a picture of why Hermes holds an enviable position in the fashion industry and is a unique player in the luxury sector.For one, Hermes has no debt. "We are self-financed and prefer to wait until the day we have the money to jump into a project," Dumas said in an interview. "I may be quoting incorrectly, but the Bible says you should build your house on rocks more than sand. What is solid is the financing of a company."Dumas proudly explained that Hermes spent $125 million last year to open new stores, renovate existing boutiques and expand its production capacity, but still ended the year with a net cash position $28.9 million higher.And it's money Hermes is not diverting to acquisitions. The publicly traded company sat on the sidelines of a spree that consumed the luxury sector in the late Nineties, when heated bidding wars between rivals Gucci Group, LVMH Moet Hennessy Louis Vuitton and Compagnie Financiere Richemont drove up prices of coveted brands to unprecedented levels."Independence is the key word," Dumas said. "We are surrounded by big groups. They have their achievements and they have their problems. We try to stay at a distance. Independence has always been the legacy of my family."Yes, these groups have developed and gathered strength. I don't know how long the solidity of these aggregates will last. A long time for them, I hope," he continued. "But we are playing in a different game."For while other groups sought majority stakes to assert their dominance and increase their bottom line, Hermes has opted for select minority investments. The firm took a 35 percent stake in Jean Paul Gaultier in 1999 and a 31.5 percent stake in high-end German camera firm Leica in 2000. The firm also owns the John Lobb luxury shoemaker, crystal producer Cristalleries de Saint-Louis and silversmith Puiforcat.Dumas said partnerships with the likes of Gaultier and Leica reflect the company's modesty, based on his belief that Hermes can learn from others."Professionally, if people consider themselves on the summit, they can only go down," he said, smiling sweetly. "We looked for companies having an exceptional talent. We receive from them the vibrations of the specialized work they do."With Jean Paul Gaultier, we certainly didn't want to own a majority," he explained. "We want the company to be sustained, to be backed up by us. But he is the master of the house and we are the guest. We must keep these companies alive. We give them the possibility of blossoming in their own style, to take advantage of who they are. We are just trying to assist them with our knowledge of management."When Hermes made its investment in Gaultier, retail development was considered an immediate priority. But it wasn't until last February that the first new Gaultier boutique opened, on Madison Avenue in New York. Another bowed in May in Cannes and a new one is slated to open soon on Avenue George V in Paris. The delay prompted some observers to speculate trouble back at the ranch.But Dumas said he's "very happy" with the pace of development of Gaultier's business, noting proudly that the company was profitable last year. "He's a fantastic person," he said. "He's very creative. It's a joy."Hermes has a history of taking its time. For example, the Tokyo flagship, an 11-story glass tower christened last June in the Ginza district, was more than a dozen years in the making. But it made its debut at a fortuitous time. In the post-Sept. 11 world, Japanese consumers stopped traveling and kept their money at home. To wit: the Ginza store now welcomes some 5,600 visitors per day.Dumas said Hermes' ability to withstand the ups and downs of the cyclical luxury sector is attributable to the balance it enjoys in terms of the distribution of its sales across product categories and geographic regions. But analysts say the more classic styling of Hermes products also insulates it from the wilder fluctuations of more fashion-driven brands.Hermes, whose ready-to-wear is designed by Martin Margiela of the avant-garde Belgian fashion school, is a firm rarely lauded for fashion creativity and innovation, unlikeChristian Dior, Gucci, Chanel or Prada. But Dumas insisted that his house is "in many respects, much more creative than some of its competitors."We change more than people think, and more than some companies thatthink they change a lot," he said. "There's also a sense of fashion that is very particular to Hermes. We are in the air of fashion, but we don't follow it. To be in fashion today is to be out of fashion tomorrow."And for Dumas, true luxury runs deep."You look with your eyes at an Hermes product, but you also feel a product in other ways. The eye is not the only sense to have the power of decision. It is also about the sound of the clasp that a handbag makes, the smell of the leather."We are in the business of quality, but the [kind of] quality you can feel and look at and sense--and not only intellectually because the product is expensive," he said.Dumas also balked slightly at the term "classic.""Yes we are classic in some ways. A saddle must be a saddle. It has to fit a horse's back and," he said, pausing for a moment to find tasteful words, "the rider's basement."But in fact, Hermes introduces about 500 new products every six months."It just happens that some products are so successful that they won't die," he said.And while waiting lists persist for such perennials as the Birkin handbag, Dumas said Hermes does have new bestsellers. One example is the "Herbag," a softly constructed, slightly less expensive handbag introduced in 1998."It is mounted, without stitching," he explained. "We sold about three times more than the Kelly bag. And I could cite many more examples."Founded in 1837 by harness maker Thierry Hermes, the company has grown under five generations of family leadership, branching out to saddles in 1867, leather goods around 1900 and women's and men's fashions in 1929. Today, the product range spans footwear, fragrance, tableware, jewelry, home accessories and all manner of fashion accessories, sold at a network of 206 stores.Given Hermes' strong performance last year, analysts expect other luxury stocks to perform better this year with higher comp figures. Most forecast a single-digit increase in operating profits for 2002.Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London, said Hermes tends to weather rough economic times better than other luxury players because its products are less conspicuous and more exclusive. Also, its client base is wealthy and less sensitive to stock-market gyrations and economic fluctuations.Dossin said Hermes' consistency proves that "small can be beautiful," applauding the firm's stringent quality commitment and careful brand management. He warned, however, that incremental growth might become difficult to sustain in the years ahead, given that the brand has already expanded into most relevant product categories. "Going forward, the need to diversify with other brands will start to become more acute," he noted.For now, Dumas said the success of Hermes rests simply on quality, beauty and desirability of its products."We are clear and frank. We create objects, and we present the prototypes," he said. "Hermes must dig its own land, cultivate its own land, and allow the seeds to develop into plants and perhaps fruit trees."And proving his contention that there is no magic formula for success in luxury goods, he cited a family tale as an analogy. He said one of his uncles, who recently died at the age of 103, lived a splendid life and attributed his longevity to one thing: he never ate sweets of any kind. Dumas decided to see if others could vouch for this strategy, so he called a woman he knows who is 102. "I have only one secret," she told Dumas. "I eat candies.""

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