Hermes Goes Big in Hawaii, Giving Vote of Confidence to Region

PARIS — Shares in Hermès International dipped in morning trading in Paris on Thursday after the French luxury house reported first-half results that fell below analysts’ expectations, as the widespread closure of stores due to the coronavirus pandemic sharply impacted its business and profitability.

Like other French luxury companies that reported second-quarter results this week, Hermès saw revenues plummet despite strong growth in mainland China and robust online sales. Its sales declined 41.3 percent to 982.5 million euros in the three months ended June 30, representing a drop of 41.5 percent in comparable terms.

Net income in the first six months of the year fell 55.6 percent to 335 million euros. Operating profit was down 53.2 percent to 535 million euros, with the operating margin sliding to 21.5 percent from 34.8 percent in the same period a year ago, weighed down by the fact that the company manufactures many of its goods.

The consensus forecast had been for second-quarter revenues of 999 million euros, an operating profit of 606 million euros, and an operating margin of 23.8 percent, Bernstein said in a research note. Hermès shares closed down 3.4 percent at 711 euros on the Paris Stock Exchange.

Nonetheless, analyst Luca Solca noted Hermès outperformed its peers in the first half, with an organic sales decline of 24.9 percent that he qualified as “remarkable” given the circumstances. By comparison, sector leader LVMH Moët Hennessy Louis Vuitton recorded a 28 percent drop, while Kering was down 30.1 percent.

“Hermès confirms to be the most resilient player in the luxury goods space,” Solca wrote. “Brand traction and consumer desirability remain strong, positioning Hermès to get out of the crisis in good shape.”

Axel Dumas, chief executive officer of Hermès, also put a positive spin on the results in a webcast with analysts and reporters on Thursday.

“Our industry is going through one of its worst crises. Personally, I think an operating margin of 21.5 percent is not bad,” he said. At LVMH, the operating margin stood at 9.1 percent in the first half, versus 21.1 percent in the same period a year ago, while at Kering, it fell to 17.7 percent from 29.5 percent.

Dumas noted that Hermès does 80 percent of its production in France, where it was forced to shut its factories for four weeks in spring, and where productivity remains lower than normal due to social-distancing measures designed to prevent the spread of COVID-19.

As reported, the company preserved the basic salaries of its employees without resorting to government aid. “We have been, I think, a good employer and a good partner to our suppliers, and that has a cost,” Dumas added.

At a time when many firms have frozen hiring, Hermès increased its workforce by almost 300 people in the first half, mainly in production. At the end of June, it employed 15,698 people worldwide.

The company maintained its guidance for ambitious revenue growth at constant exchange rates in the medium term. “For 2020, the impacts of the COVID-19 pandemic remain difficult to assess today due to the developments that are continuing in the various geographic areas,” Dumas said.

“We have seen a gradual improvement in business since the end of May, and the loyal clients, desirable collections, agile network and independence of the group are the pillars that give us confidence in the future and will support our recovery,” he added.

In a sign that things are gradually returning to normal in its domestic market, Dumas said Hermès plans to stage a physical show on Oct. 3 for its spring 2021 women’s ready-to-wear collection, after presenting the men’s line with a live online performance earlier this month.

Businesswise, Hermès hit a low point on April 20, when more than 75 percent of its store network was shut. The situation remains polarized, with retail sales — which account for 90 percent of its revenues — recording a double-digit increase in Asia-Pacific and Japan in June, while the U.S. and Europe continued to struggle.

“The trends we are seeing in July are in line with the second quarter, meaning they continue to improve from month-to-month,” Dumas said.

Revenues in Asia-Pacific, excluding Japan, fell by a relatively modest 9.1 percent in the second quarter. Sales were dragged down mainly by Hong Kong and Macau, and the travel retail portion of the business, but online sales recorded strong growth during the period, despite the reopening of stores.

Sales in the Americas plummeted 73.8 percent at constant exchange rates in the second quarter, as stores were closed for more than 10 weeks. Despite a very gradual recovery at the end of June, the outlook for the U.S. remains uncertain due to the health crisis, Dumas said.

Europe was down 60.7 percent, hit by the drop in tourism, while sales in Japan fell 47.5 percent. Dumas said there was little prospect of immediate recovery in travel.

Analysts estimate that travelers account for 40 percent of luxury goods purchases in value terms, though Dumas declined to provide figures for Hermès.

He noted the group has seen strong local demand wherever it has reopened stores, citing the examples of Germany, Hong Kong and Japan, so that it does not plan to tweak its retail network. It expects to inaugurate three stores in the second half, take back two concessions and reopen 12 stores after renovations or extensions.

Online sales were another bright spot, as the company continued the rollout of its new digital platform, adding Hong Kong and Macau in February and South Korea in June. While Dumas did not provide details, he said e-commerce allowed the luxury brand to acquire new customers during the lockdown.

“These sales were not made to existing Hermès customers. We estimate that more than 75 percent were new customers,” he said.

In global terms, silk and textiles were hit hard, down 60.1 percent in comparable terms in the three months to June 30. Perfumes lost 58.5 percent, rtw and accessories 46.3 percent, and the key leather goods and saddlery division saw revenues fall 40 percent.

The other sectors division, which includes jewelry and home products, remained fairly resilient, with a decline of 11.4 percent. Watches were down 29.4 percent, and other products — which includes Hermès-owned brands such as John Lobb, Shang Xia and Puiforcat — fell 45.5 percent.

Hermès said it has maintained investments in production capacity, and in July acquired 100 percent of J3L, a company specializing in metal parts for leather goods and fashion accessories. Hermès previously held a 30 percent stake in the company, which is one of its long-standing suppliers.

It is also going ahead with investments in four planned new production sites in France. “For 2021, we hope to be able to resume the group’s usual growth rate,” Dumas said.

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