PARIS — Hermès International’s 0.4 percent decline in fourth-quarter sales as a result of the strong euro prompted questions about how much currency rates will affect the luxury sector in coming months.
The luxury firm known for its Birkin and Constance handbags said that sales for the last three months of the year totaled 1.5 billion euros, up 4.6 percent at constant exchange rates, lifted by growth from the leather-goods and fashion divisions. Sales of silk and textiles were down 0.9 percent at constant exchange rates, weighing on the group’s overall performance.
Currency fluctuations shaved 100 million euros off of annual revenues in 2017, Hermès said.
With around 68 percent of sales coming from outside Europe, a continued strong euro could weigh on future growth, predicted Rim Ben Salah, analyst with Alphavalue, citing the increase in the cost of luxury goods and the dampening effect of the currency’s rise on tourist flows. The slower pace of growth at the company is expected to continue in the first quarter with constraints in production capacity and shortages of inventories, she added.
Operating profitability for the year should be similar to the first half, when it reached 34.3 recent of revenue, the company said.
While fourth-quarter sales fell slightly below market expectations, the forecast for operating margin was well above market consensus, noted Rogerio Fujimori, analyst with RBC in a research note to clients.
At constant rates, the leather-goods division, the company’s largest business, posted a 5.8 percent rise in the quarter to 742.7 million euros, with ready-to-wear and fashion accessories climbing 5.6 percent to 298.5 million euros.
“One quarter does not make a trend,” said Fujimori, noting a deceleration in the three main product divisions — leather goods, ready-to-wear and silk goods – compared to previous quarters. Timing of deliveries likely impacted sales of leather goods, he added.
“Our fundamental thesis remains the same for many years covering Hermès: this brand remains the closest brand in our coverage to the ‘perfect luxury paradox,’ simultaneously balancing characteristics like timeless, modernity, consistent growth and high profitability,” Fujimori concluded.
Hermès said that the growth in its leather goods and saddlery division over the entire year, up 9.7 percent, was in line with its annual growth target in production capacities. The company last year revealed plans to add two new production sites, slated to begin operating in 2020.
“Obviously, extending production capacity would help to meet the high demand for coveted products and boost the group’s performance,” added Ben Salah.
The quarterly performance was “overall solid, but more moderate in comparison to the successful players in the market at the moment,” noted Luca Solca, luxury analyst with Exane BNP Paribas.
The analyst sees a polarization in the market, which is rewarding brands that innovate “quite significantly and aggressively” like Gucci, Saint Laurent, Louis Vuitton, Fendi and Balenciaga. Brands that are generating strong organic growth will likely not be very affected by a strong euro, in his view.
Last month, LVMH Moët Hennessy Louis Vuitton reported 10 percent organic growth of its leather goods division over the fourth quarter, fueled by the Louis Vuitton brand. Gucci owner Kering reports full-year results on Feb. 13.
Companies that are less inventive risk running into challenges, according to Solca’s prognosis.
“Brands that take a more conservative approach are probably not as successful in tapping into younger consumers’ demand and most importantly the Chinese Millennials,” he added.
While the silk and textile division’s performance was dragged down by “inventory availability issues — I wonder — I think that this category is probably not resonating very much with the younger consumers. We’re talking about scarves and ties and this is not clearly the category at the top of the younger consumer’s priorities. I think there could be an element of that at play as well,” Solca noted.
Hermès said its new web site is set to get off the ground in Europe in the first half, following deployment in the U.S. and Canada. It plans to roll the site out in China at the end of the year.
While flagging global uncertainty in its outlook, Hermès nonetheless reiterated it seeks sales growth for the year.
“In the medium-term, despite growing economic, geopolitical and monetary uncertainties around the world, the group confirms an ambitious goal for revenue growth at constant exchange rates,” it said in a statement.
The watches division posted 1.8 percent growth, at constant rates, over the quarter, with the company noting good sales in its own stores and saying that its offer presented at the Geneva watch fair was “very well-received.”