PARIS — In another sign that currency headwinds are creating headaches for luxury firms, Hermès International warned Friday it expects its operating margin to take a hit after foreign exchange swings again took a chunk out of second-quarter revenues.
This story first appeared in the July 21, 2014 issue of WWD. Subscribe Today.
The luxury goods sector faces a relatively tough period as organic growth slows from Europe to Japan, analysts say.
Barclays Capital forecast in a recent report that operating margins would fall between 40 and 280 basis points in the first half due to slower like-for-like sales and the impact of foreign-exchange variations.
Hermès reported sales rose 5.8 percent in the three months ended June 30, with a negative currency impact of 73 million euros, or $100 million, during the period.
When stripping out the impact of exchange-rate variations, this represented an increase of 9.6 percent, below market expectations and the 14.7 percent increase registered in the first quarter.
The maker of Kelly bags and silk scarves said due to the negative foreign-exchange effect, operating margin for the first half of 2014 should be slightly lower than the 33.1 percent recorded during the same period last year, and closer to the historic high of 32.4 percent reached for 2013 as a whole.
Luca Solca, managing director and sector head of global luxury goods at Exane BNP Paribas, predicted a 50-basis-point contraction in first-half operating margin, adding that the consensus estimate called for a drop of 30 basis points in the full-year margin.
Hermès chief executive officer Axel Dumas warned analysts earlier this year to expect a drop in profit in 2014 in light of the strong currency headwinds, which already wiped 40 million euros, or $54.8 million, from its books in the first quarter.
The sales slowdown in the second quarter followed a 10.1 percent progression in the first quarter, and was due mainly to a deceleration in the Americas and Japan.
At constant exchange rates, turnover in Japan edged up 1.6 percent following a 21.7 percent jump in the first quarter, when consumers anticipated purchases ahead of a rise in sales tax on April 1. Sales in Asia-Pacific, excluding Japan, rose 16.8 percent in the second quarter.
The Americas advanced 7.9 percent, down from a 17.9 percent rise in the first three months of the year, while Europe registered 6 percent sales growth.
The company’s revenues in the second quarter totaled 963.4 million euros, or $1.32 billion, up from 910.4 million euros, or $1.19 billion, during the same period a year earlier. All dollar rates are calculated at average exchange for the periods to which they refer.
Sales of ready-to-wear and fashion accessories were up 12.9 percent at constant exchange rates in the second quarter, and other Hermès sectors — spanning jewelry to tableware — jumped 18.9 percent. Silk and textiles posted a 9 percent rise.
Leather goods and saddlery, including the iconic Birkin bag, registered a 10 percent increase in the quarter, while sales of perfumes rose by 10.5 percent, supported by the launches of the Jour d’Hermès Absolu and Terre d’Hermès Eau Très Fraîche fragrances.
Watch revenues dropped 12 percent as demand in China remained weak in the wake of a government anticorruption drive that has impacted sales of expensive gifts.
Among sector peers expected to report sales in the next weeks are Kering, LVMH Moët Hennessy Louis Vuitton and Swatch Group, whose ceo Nick Hayek has warned that foreign-exchange swings could dent the group’s revenues by up to 500 million Swiss francs, or $557 million at current exchange, in 2014.