PARIS – Hermès International on Thursday said 2005 net profit rose 15 percent, boosted by improved second-half sales in the key Japanese market and double-digit gains at directly owned stores.

The French luxury firm said net income improved to 247 million euros, or $307.6 million, from 213.9 million euros, or $266.1 million, a year ago. Operating income grew 7.4 percent to 383.5 million euros, or $477.6 million, from 357.1 million euros, or $444.2 million, the firm said. Currency conversions are based on the average exchange rate for the period.

While operating income missed most analysts’ expectations, net profit increased faster because of an extraordinary 21-million-euro, or $26.1 million, restructuring charge in 2004 at the Leica camera business that Hermès controls.

A spokeswoman for the house said sales in the first two months of the year were “in line with expectations” and that the firm’s full-year organic sales growth target for 2006 is 7 percent, seemingly more conservative than Europe’s other major luxury players, which have had double-digit sales gains.

Hermès’ sales rose 7.2 percent in 2005 to 1.43 billion euros, or $1.78 billion, building momentum in the latter part of the year.

European luxury firms have been pumped up by buoyant sales in Asia and the U.S. This month, PPR said operating income at its Gucci Group luxury arm jumped 35.4 percent, and LVMH Moët Hennessy Louis Vuitton said 2005 profits bounded 21 percent.

Hermès said its expansion will continue in 2006, with investments earmarked for the opening or renovation of some 30 stores, including a new Hermès House in Seoul and the extension of the Hermès House in Tokyo. Other shops scheduled to bow are in Amsterdam; Charlotte, N.C.; Hangzhou, China, and Bangkok.

Developing production is a priority — especially as the house regularly can’t meet demand for top-selling bags. Last year the bulk of the 119 million euros, or $148.2 million, in investment went to increasing production capacity for high-margin handbags and luggage, Hermès said.

Communication budgets are set to increase 15 percent during 2006, a spokeswoman said.

This was a year of transition at Hermès, during which Patrick Thomas became chief executive, succeeding legendary house leader Jean-Louis Dumas, 68, who last September said he would step down as ceo and artistic director.

This story first appeared in the March 24, 2006 issue of WWD. Subscribe Today.

Thomas is the first non-family member to helm Hermès, which has sparked speculation that the company could be a takeover target and has sent Hermès shares up 37 percent in the last 12 months. In a report last week, HSBC analyst Antoine Belge said an acquisition scenario at Hermès seemed unlikely, since the other family members have little interest in selling.

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