Hermes Proves Luxury’s Strength

The skies continue to appear cloudless for the high-flying luxury sector.

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PARIS — The skies continue to appear cloudless for the high-flying luxury sector.

This story first appeared in the September 1, 2010 issue of WWD.  Subscribe Today.

Hermès International on Tuesday edged up its sales forecasts for the year after reporting profits in the first half bounded 55.2 percent to 194.6 million euros, or $258.9 million, versus 125.4 million euros, or $166.8 million, a year ago.

The French luxury goods firm is projecting sales growth at constant exchange rates of around 12 percent for the full year, versus an earlier target of about 10 to 12 percent.

HSBC is bullish on luxury, too, and on Tuesday upped its 2010 global growth forecast for the sector to 11 percent from 10 percent. Shrugging off concerns about a high basis of comparison going forward, the investment firm said the luxury sector should post organic growth of 7.5 percent in 2011 and outperform general retail in Europe and the U.S., with Asia roaring ahead and Japan harboring the potential to surprise.

“Luxury companies are still spending cautiously, the China theme is positive for margins and the euro weakness is a poster,” HSBC analysts Antoine Belge, Erwan Rambourg and Sophie Dargnies wrote in a report titled “Not too late to buy.”

HSBC has overweight ratings on most of the stocks in its universe, including LVMH Moët Hennessy Louis Vuitton, Compagnie Financière Richemont, PPR, Tiffany, Coach and Luxottica. It upgraded Bulgari, but downgraded Burberry and Hermès, both on valuation.

Shares in Hermès have risen about 52 percent year-to-date, and HSBC warns “there’s a limit to how much investors should be willing to cash out for such a quality asset.”

That said, however, “we believe Hermès sales trends will not underperform the industry. The current move away from conspicuous consumption should benefit Hermès thanks to its classical positioning.”

In a research note, Evolution Securities analyst Dennis Weber derived the same opinion from Hermès’ better-than-expected results: profit recovery for the sector continues to accelerate.

“Business continues to be good,” a sanguine Hermès chief executive officer Patrick Thomas told WWD, singling out the company’s robust performance in France and its historical base in Europe, up 17 percent in the half.

“It’s growing at a spectacular pace, partly because of the local customer and partly because of Asian tourists,” he said, noting that a rising yen and weak yuan are fueling spending patterns in the brand’s favor.

Hermès also continues to register robust growth in Asia and the United States, the latter up 26 percent at the end of June and characterized as a “stronghold” by Thomas. Hermès continues to raise its profile in key markets in the U.S., including New York, where earlier this year it opened a men’s only store on Madison Avenue and recently upgraded the leather goods department in its women’s flagship (see sidebar).

During the first half, sales totaled 1.07 billion euros, or $1.43 billion, up 22.8 percent from 874.9 million euros, or $1.17 billion, during the same period in 2009, as reported. Sales of leather goods were up 31.5 percent, while ready-to-wear and fashion accessories posted a 25.7 percent rise. Silk and textiles registered a 24.3 percent increase.

Operating profits jumped 52.4 percent to 304.5 million euros, or $405.1 million, versus 199.8 million euros, or $265.8 million, in the first six months of 2009.

Aided by currency tailwinds, Hermès said it would improve the current operating margin by at least 100 basis points in 2010.

On Sept. 16, Hermès plans to unveil in Shanghai the first location for its new Chinese brand Shang Xia, but Thomas noted the project would not have any financial impact in fiscal 2010. He noted the firm would open “plenty more” locations, but declined to detail its expansion plan.

Hermès also plans to open or renovate 20 boutiques this year, including a Left Bank flagship here on Rue de Sevres. The unit would have a large space dedicated to furniture and other products for the home, Thomas said.

Long of the opinion that the 2009 financial crisis would have a lingering impact, Thomas cautioned that economic factors, such as topsy-turvy consumer sentiment in the U.S., could impact the company’s growth rates in the second half. Still, he allowed that Hermès has lately been proving itself an exception to its own rule.

“Hermès used to be strong in crisis and grow more slowly during boom times. Now we are growing fast in both periods,” Thomas said.

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