“I don’t see any reversal in trend in Asia-Pacific, excluding Japan,” Hermès chief executive officer Axel Dumas said on Wednesday after the French luxury firm reported strong first-half earnings growth. Sales in the region were up 18.6 percent at constant exchange rates in the second quarter.
Tourist arrivals in Hong Kong fell nearly 40 percent in August versus the same period last year, following a 5 percent drop in July, Financial Secretary Paul Chan Mo-po said in a blog post on Sunday. That represents the biggest monthly decline since the SARS outbreak in 2003.
Dumas said the protests had forced some of the company’s seven Hong Kong stores to close sporadically, especially in the Central District, where it opened a new three-story flagship last year. Nonetheless, he said the brand was buffered by the desirability of its products and the fact that it has a strong local client base.
“We are very positive on Hong Kong, where we have been present for a long time,” he said. “We hope they will find a political solution that satisfies everyone and that the situation will [return to normal].”
Hermès entered the Hong Kong market in 1969, selling its scarves and ties at department store Lane Crawford, and opened its first store there in 1975 at the Peninsula hotel in Kowloon. In addition to its Hong Kong boutiques, the company has 26 stores in mainland China, where business remains brisk.
As reported, sales at Hermès International climbed 14.7 percent to 1.67 billion euros in the second quarter, beating expectations.
Dumas noted the brand is constantly dealing with fluctuations in tourist flows, pointing out that sales in France were up 6.2 percent in organic terms in the three months to June, despite a series of violent antigovernment protests by the gilets jaunes, or yellow vests, movement.
He said the U.S. market, up 9.8 percent in the second quarter, benefited from a “flight to quality” in a volatile environment, as well as the opening of stores in New York City’s Meatpacking District, The Mall at Millenia in Orlando, Fla., and Waikiki in Hawaii. A new flagship on Madison Avenue will bow in 2022.
This week, it will add a store in Xiamen, on China’s southern coast, to be followed in the second half by new or expanded units in Fukuoka, Japan; Stuttgart, Germany; San Francisco, and Vancouver. It will also enter the Polish market with a boutique in Warsaw, and launch e-commerce in Singapore and Malaysia.
Hermès is poised to expand its reach with the launch of its cosmetics and skin-care lines in the first quarter of 2020. Dumas said its launch partners include Harrods in London and retailers in the U.S. and South Korea, but most of the distribution would be through its own network of stores and e-commerce site.
Buoyed by its positive global sales momentum, the luxury brand posted net profits of 754 million euros in the first half, up 7 percent year-on-year. Restated to take into account the non-recurring gain from the sale of the former Gallerie store premises in Hong Kong last year, the increase was 15 percent.
Meanwhile, recurring operating income rose 15 percent to 1.14 billion euros, propelling the recurring operating margin to 34.8 percent, above the company’s guidance and close to the record 34.9 percent posted in the first half of 2018.
The figures were the first to take into account IFRS 16, an accounting rule that requires companies to record all future lease rents as debt on the balance sheet. The rule had a positive impact of 0.4 percent on recurring operating profit for both the first semester of 2019 and the restated figures for the same period last year.
Rogerio Fujimori, analyst at RBC, said the operating profit implied stable profitability year-on-year, with strong revenue growth allowing Hermès to offset the negative impact of foreign exchange hedges. Factors including an employee share distribution plan were set to weigh on the margin in the second half.
“In summary, no major surprises here,” he said in a research note. “Hermès offers the strongest long-term fundamentals and the most resilient earnings profile in our luxury coverage.”
Nevertheless, Fujimori has set a 12-month share price target of 615 euros, below the 640 euros at which Hermès is trading now, noting that its growth differential versus peers tends to widen in difficult times but narrow at times of improving demand, with growth in the key leather goods division capped by production bottlenecks.
Dumas noted the leather goods division, which accounts for half the company’s revenues, grew 12.4 percent at constant exchange rates in the first half, due to strong demand for classic models like the Kelly and the Birkin, as well as more recent designs like the Mosaïque and 24/24 bags.
But he expects that pace to slow in the second half, maintaining the company’s target for leather goods growth of 10 percent for the full-year, of which 7 to 8 percent will be volume-driven, and 3 percent will come from price increases.
Hermès plans to open three new handbag workshops to keep pace with demand, including a plant in Guyenne, near Bordeaux, that will open next spring. Each site will eventually employ 250 craftspeople, but the company’s “one person, one bag” rule means the artisans can produce only two bags per week on average.
As a result, Dumas was sanguine about a draft law that would prevent companies from destroying unsold clothing, which is due to go before the French Senate later this month, noting that it seemed to be aimed at mass players like Amazon rather than luxury firms.
“It takes us 16 hours to make each bag, with someone that we have trained for a long time and using the best available leathers in the world, so anytime we destroy one, it breaks our heart. We aim to have zero destruction, and to recycle what we can,” he said.
Dumas said Hermès reuses fabrics like cashmere, channels other materials into its Petit h line, and gives away clothes after removing any brand ID.