Hermès Himalaya Niloticus crocodile diamond Birkin

PARIS — Hermès International on Wednesday reported record results for 2016 and confirmed its “ambitious” goal for revenue growth this year, adding to growing evidence of a recovery in the luxury sector.

The maker of Birkin bags and silk scarves said 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.

This story first appeared in the February 9, 2017 issue of WWD. Subscribe Today.

Revenues totaled 1.5 billion euros, or $1.62 billion, in the three months to Dec. 31, up 6.6 percent at constant exchange rates, broadly in line with consensus forecasts.

The quarter capped a year of solid growth for Hermès, with sales up 7.4 percent at constant exchange rates to 5.2 billion euros, or $5.75 billion, in 2016 — marking the first time it has crossed the threshold of 5 billion euros.

The performance was in line with the French luxury firm’s prediction 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.”

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.

Despite this, the company’s shares closed down 1.78 percent at 395 euros, or $422.75, on the Paris Stock Exchange on Wednesday as some analysts cautioned that Hermès would fall in line with its sector peers this year. The share price has risen 32.5 percent in the last year.

The company, which is scheduled to report full-year earnings on March 22, reiterated that it expects its operating margin for the full year to be slightly higher than the 31.8 percent of sales recorded in 2015. Hermès no longer quantifies its medium-term revenue growth target.

Fourth-quarter growth was driven by France, which posted organic growth of 7.1 percent after falling 0.9 percent in the third quarter, suggesting the country is turning the corner after a year marked by the impact from the series of terrorist attacks, which have sharply dented tourism.

The situation appears to have normalized, as evidenced by the muted reaction to the shooting of a man wielding a machete by a French soldier standing guard at the Louvre museum’s underground shopping center on Friday. Industry sources expected minimal fallout on retail from the attack.

Hermès said sales in the rest of Europe were up 9 percent at constant exchange rates, after a 9.8 percent rise the previous quarter. Japan accelerated with sales up 8.9 percent, but the Asia-Pacific region posted a more moderate growth of 4.4 percent. The Americas were up 5.5 percent, reflecting a slight slowdown.

Revenue growth was again driven by leather goods and saddlery, up 8.5 percent at constant exchange rates. Hermès noted that the segment posted “remarkable” growth of 14 percent in the year as a whole, driven by the success of the Constance, Halzan and Lindy bags alongside its classic Birkin and Kelly models.

The increase was supported by a sustained pace of deliveries and production, with three new manufacturing sites coming on stream.

Silk and textiles rebounded after a difficult year, posting growth of 11 percent in the fourth quarter. Ready-to-wear and fashion accessories were up 4.1 percent and perfumes rose 16.9 percent, but watches fell 11.6 percent as conditions for the sector remained tough, particularly in Asia.

The Hermès figures come amid signs of a recovery in the luxury sector. LVMH Moët Hennessy Louis Vuitton reported organic growth of 8 percent in the fourth quarter, while Compagnie Financière Richemont recorded a 5.7 percent increase in revenues in its fiscal third quarter.

Rogerio Fujimori, analyst at RBC Capital Markets, maintained his “perform” rating on Hermès, with a target price of 400 euros, or around $428 at current exchange rates. However, he believes the house will no longer over-perform.

“In our coverage, Hermes remains the closest brand to the ‘perfect luxury paradox,’ simultaneously balancing characteristics like timelessness, modernity, growth and high profitability,” he said in a research note.

“These strengths seem to be now properly reflected in its premium valuation. Hermes’ growth differential versus peers tends to widen in difficult times but narrow at times of improving demand, which is our base case scenario for 2017, when we see growth for leather goods normalizing after above-trend growth in 2015-16,” he added.

Other analysts warned that by producing more handbags and introducing accessibly priced leather goods lines, such as the Garden Party and Evelyne, Hermès risks losing the cachet it gained in the past by restricting supply and putting customers on long waiting lists for high-priced bags like the Birkin.

“We think that ‘demand frustration’ and ‘category segregation’ were the two traits that set Hermès apart from mega-brand peers. With these gone, the ‘genetic difference’ between Hermès and – say – Louis Vuitton is more difficult to identify,” Exane BNP Paribas said in a recent report.

Luca Solca, heads of luxury goods at the equity broker, said in a separate research note on Wednesday that Hermès is trading on a price-to-earnings ratio of 34.8 for 2017, a premium of 31 percent versus the luxury goods sector.

“We believe that the Hermès multiple is bound to move back toward the industry average over time. Assuming that Hermès is different and will stay different over time may carry significant risk for the long-term investor,” he said.

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