PARIS — Galloping handbag sales propelled Hermès to a record profit in 2016 — but don’t expect those waiting lists to suddenly go away.
The maker of Birkin bags and silk scarves broke through the one-billion-euro barrier to post a net profit of 1.10 billion euros, or $1.22 billion, last year, up 13 percent from 2015.
Operating margin rose to an all-time high of 32.6 percent of sales, up from 31.8 percent in 2015 — in line with the company’s target and reflecting the favorable impact of foreign currency hedges.
The profit growth was fueled by a 14 percent jump in organic sales of leather goods and saddlery, following a 12.6 percent rise in 2015 — rates that have some analysts questioning whether Hermès is forsaking its tradition of drip-feeding its products to customers willing to wait months for a Birkin or Kelly bag.
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“There is no change in strategy,” Hermès chief executive officer Axel Dumas told analysts and journalists gathered at the company’s headquarters in Paris on Wednesday. “The year of leather was quite exceptional and we are not expecting that every year.”
The French luxury firm has been steadily ramping up its production capacity and now has 15 plants in France, most of which employ between 250 and 300 people. Each handbag requires on average 16 hours to make by hand, meaning most artisans produce just two a week, Dumas said.
“We expect in 2017 a growth rate which is normal; 2016 was exceptional — all the stars aligned,” said Dumas, noting that productivity soared as some of its artisans, who hone their skill over several years, hit peak capacity faster than expected, while existing stock flew off shelves.
“Whatever the model, whatever the store, sales were excellent,” the executive reported. “The Birkin remains our flagship product, obviously, and the Kelly is enjoying a new lease on life. But other bags, including the Constance and Lindy, are also doing very well.”
Hermès raised the price of its handbags by 3 percent in Europe, reflecting the increased cost of production in the region, but left them unchanged elsewhere. Providing exchange rates remain roughly stable, it expects to implement the same pricing policy through 2019, Dumas said.
“We don’t have a marketing department, and therefore our prices are not determined by the desirability of the product; its price positioning with regard to the competition, or what people are willing to pay for it. It is determined by its manufacturing cost,” he said.
By contrast, watch sales continued to drag on results, falling 3.2 percent in 2016 amid a generalized slump in exports to Hong Kong, the world’s number-one market for luxury timepieces.
Dumas said Hermès, which earlier this week unveiled the latest models in its ongoing collaboration with Apple Watch, aims to improve its offering of traditional men’s watches with more frequent launches. “It’s a work in progress,” he said.
As reported, Hermès posted record sales in 2016 and confirmed its “ambitious” goal for revenue growth this year, adding to evidence of a recovery in the luxury sector. Sales rose 7.4 percent at constant exchange rates to 5.2 billion euros, or $5.75 billion — crossing the threshold of five billion euros for the first time.
Growth in 2016 was below the 8 percent recorded the previous year, and at its lowest level since 2009. Nonetheless, Hermès has performed better than many of its competitors, which are struggling to adjust to a decline in demand from China, which accounts for one in three luxury purchases worldwide.
The performance was in line with its initial forecast that revenue growth in 2016 could be below its medium-term goal of 8 percent at constant exchange rates “owing to the economic, geopolitical and monetary uncertainties around the world.” Since then, Hermès has dropped its mid-term annual sales growth target.
Dumas said the company had not seen a significant bounce in China because its sales there never flagged. “Some brands have posted big rebounds in China. We have remained very stable and very constant in our growth in China over the last few years. We shall see how it plays out in 2017,” he said.
Asia-Pacific, excluding Japan, accounted for 34 percent of sales in 2016, with Japan representing another 14 percent. Europe, excluding France, contributed 19 percent, France 14 percent and the Americas 18 percent.
Sales rose 7.6 percent in the fourth quarter, helped by strong momentum in Europe, indicating that tourists are returning to the region after a year marked by a series of terrorist attacks in France, Belgium and Germany.
“We remain cautious for 2017, but our sales objective is ambitious compared to the rest of the market,” Dumas said. “Yes, there is a recovery in Chinese tourism, but beware: it’s still not back to prior levels in France.”
Hermès plans to open stores in São Paulo, Istanbul and Changsha, China, this year. It will close two units: one at London department store Harrods and the other in Charlotte, N.C. It will also continue its policy of renovating and expanding existing stores, with revamped stores bowing in London and Munich last week.
The company will propose a dividend of 3.75 euros, or $4.05 at current exchange rates, a share, up 12 percent year-on-year. Net cash amounted to 2.32 billion euros, or $2.57 billion, on Dec. 31, up around 750 million euros, or $830 million, from the previous year.
Dumas said capital expenditure would total between 280 million euros and 300 million euros, or $303 million to $324 million, in 2017, compared with 262 million euros, or $290 million, last year. All dollar rates are calculated at average exchange rates for the period concerned.
The company, which plans a significant fragrance launch in the fourth quarter, is mulling an entry into skin care and cosmetics. Dumas excluded expanding into eyewear, a category that has seen major upheaval since the start of the year. “We don’t do licenses at Hermès,” he said.
Hermès shares closed up 0.88 percent at 432.20 euros, or $467.39, on the Paris Stock Exchange, having gained almost 11 percent since the start of the year.