Hermès RTW Spring 2013

After reporting a 24.2 percent spike in sales, the French luxury firm revised its forecast for the year.

PARIS — Hermès International upped its sales guidance for 2012 after posting better-than-expected results in the third quarter, as sales growth accelerated despite Europe’s economic woes and a general slowdown in luxury spending in China.

This story first appeared in the November 9, 2012 issue of WWD. Subscribe Today.

Shares in the maker of Birkin bags and silk scarves closed up 2 percent at 223.60 euros, or $304, on the Paris stock exchange after the company reported sales rose to 848.6 million euros, or $1.06 billion, in the three months to Sept. 30, from 683.2 million euros, or $967.2 million, during the same period a year earlier.

All dollar rates are calculated at average exchange for the period to which they refer.

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Third-quarter sales were up 24.2 percent year-on-year, after rising 21.9 percent in the second quarter. Stripping out exchange rate fluctuations, sales were up 15.7 percent in the third quarter.

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Hermès again raised the target for consolidated annual sales growth at constant exchange rates, saying it could now exceed 13 percent. In September, the group revised its forecast to 12 percent from 10 percent previously.

The company maintained its forecast that the current operating margin will fall between the 2010 level and the record high of 31.2 percent hit in 2011.

The results indicated Hermès is bucking the factors that have slowed third-quarter sales at other major luxury players. Chief executive officer Patrick Thomas said the brand’s success was due to its focus on painstakingly crafted objects made from top-quality materials.

“What you are seeing is that companies who work in this spirit, with this philosophy —for example, certain big Swiss watchmakers or certain other houses in our universe — are doing better than other houses which focus more on the brand and on what has been dubbed ‘masstige,’” Thomas told WWD.

He noted that Hermès continued to thrive in China, despite a slowdown in growth and last summer’s announcement of a Chinese government ban on using public funds to buy luxury goods, effective Oct. 1, as part of efforts to clean up the image of government officials ahead of this week’s all-important Communist Party Congress.

Third-quarter sales grew by 27 percent in Continental China and by 26 percent in Greater China, Thomas said, adding that Greater China now represents 21 percent of total sales at Hermès, versus 19 percent at the same time last year.

“China continues to do very well for us. Demand has not weakened,” the executive said, although he noted sales of watches were down. The drop coincided with a public outcry over politicians wearing expensive timepieces, which are seen as emblematic of corruption in party circles.

Overall, sales in Asia-Pacific remained a key driver of growth, rising 36.1 percent during the period. The Americas posted a 27 percent increase, while France recorded a jump of 18.8 percent. Sales in the rest of Europe were up 14.9 percent.

Thomas said France, which accounted for 16 percent of the company’s sales as of Sept. 30, continued to perform well despite a morose economic climate.

“The third quarter saw even more rapid growth than in the first two quarters. This is due both to continued strong spending by our French customers and to the presence of tourists who come to shop at our stores,” he said.

However, Thomas said measures designed to boost the competitiveness of French firms, unveiled by Socialist Prime Minister Jean-Marc Ayrault on Tuesday, were insufficient. They include annual tax rebates worth 20 billion euros, or $27.2 billion at current exchange, designed to reduce labor costs for companies, and an increase in value-added tax in 2014 to 20 percent from 19.6 percent today.

“What French companies want is a reduction of production costs in France. So the measures that were announced — which we don’t yet fully know the scope of — do not meet the expectations of French companies 100 percent,” Thomas said, adding that Hermès makes around 85 percent of its products in France.

The luxury maker, which hires between 200 and 250 people a year in its workshops in France, said it expected to take on 700 people worldwide in 2012 and between 700 and 800 in 2013 to keep pace with growth.

Nonetheless, the company expects sales of leather goods and saddlery to remain capped at around 10 percent a year in volume terms for the foreseeable future, due to the amount of time it takes to train new staff.

In the third quarter, leather goods sales were up by 18.4 percent in value terms, underperforming other sectors like ready-to-wear and accessories, up 29.1 percent; silk and textiles, up 21.7 percent, and watches, up 24.7 percent. Sales of perfumes gained 14.1 percent during the period.

The results came on the heels of figures showing sales at PPR rose 16.3 percent in the third quarter, while revenues at LVMH Moët Hennessy Louis Vuitton were up 14.8 percent. Burberry said revenues were up 2.6 percent in its fiscal second quarter ended Sept. 30.

Thomas said he was upbeat about the outlook for Hermès, despite factors that included probable further increases in the cost of raw materials next year.

“I am pessimistic about external factors, but I have always been very confident in the strength of this house and its capacity to make customers dream, and this is more and more the case the older I get,” said Thomas, who will hand over the reins to Axel Dumas next year as part of a planned management transition.