PARIS — Strong third-quarter sales at Hermès International underscored the continuing selling power of iconic luxury goods despite the recession. But the company’s comments about the stronger euro raised question marks on industry earnings as the economic crisis begins to recede.
This story first appeared in the November 9, 2009 issue of WWD. Subscribe Today.
Hermès said Friday it might beat its target of flat sales at constant exchange rates in 2009 if current trends continue. However, it also flagged a 5 percent drop in full-year underlying profits, blaming the strengthening euro during the second half of this year.
“The strong euro is going to take its toll in the fourth quarter, which accounts for around 35 to 40 percent of industry profits,” HSBC analyst Antoine Belge wrote in a note to clients.
Belge also pointed out that 2010 industry earnings won’t be immune to the stronger euro, since luxury companies are not hedging the conversion of their foreign units’ profits.
“In addition, hedging will only smooth the negative impact over time, meaning 2011 earnings will take the full hit,” he added.
Around 40 percent of Hermès’ sales are euro denominated, with about 30 percent of products sold in Japanese yen and 25 percent in dollars. Rivals such as LVMH Moët Hennessy Louis Vuitton and Compagnie Financière Richemont have a stronger exposure to dollar sales, but their costs are mainly in euros.
Analysts at Evolution Securities, however, were upbeat about the resumption of longer-term growth for the luxury industry, noting companies remain overly cautious about a potential recovery, given the recent trend of forecast-beating earnings. “A tick up in demand, an end to the drastic destocking and easing comparatives will probably mean a much more stable environment for the sector,” they concluded in a research note.
At Hermès, the demand for high-end handbags and leather accessories is continuing unabated.
“Sales trends in October are in line with the results we saw in September, if not slightly better,” chief executive officer Patrick Thomas told WWD.
Sales in the three months ended Sept. 30 rose 10.2 percent to 452.1 million euros, or $646.5 million, on a reported basis and 4.8 percent at constant exchange rates, helped by demand for silk scarves and leather goods as well as currency fluctuations. Dollar figures were converted at average exchange rates for the period to which they refer.
The 13 percent dip in third-quarter wholesale revenues — a trend experienced by the entire luxury sector as retailers keep inventories low amid declining demand — was smaller than in the previous quarter, when sales of perfumes, watches and tableware were down 22 percent at constant exchange rates.
Sales in the January-to-September period were 1.33 billion euros, or $1.9 billion, up 8.5 percent on a reported basis, driven by silk scarves, fashion accessories and leather goods, with a particularly strong demand for leather bags. At constant exchange rates, sales rose 1.4 percent in the period.
“We had a breakthrough with the new bags, such as Lindy and Jypsiere, but Kelly and Birkin also continued to sell well,” Thomas said.
Nine-month sales also benefited from an 86 million euro, or $123 million, uplift from the stronger yen and dollar during the first half of this year.
Concurring with comments made by rivals LVMH and PPR, Hermès said its operations in Asia excluding Japan recorded “impressive sales growth” fueled by a robust expansion in China and South Korea.
Hermès continues to expand its boutique network, with plans to open or renovate six branches, including a new store in Seattle and another in Calgary, Canada, by yearend. New stores also are due to open in Panama and Turkey in December.
Such plans are part of Hermès’ strategy of retaining control over its distribution network, which has proved far more resilient to the downturn than the wholesale business. During the third quarter, sales from directly owned stores grew 18 percent at current exchange rates and 12 percent at constant exchange rates.
In early October, Hermès purchased jeweler Asprey’s flagship in London, paying 83 million euros, or $118.7 million, for the 20,000-square-foot building on New Bond Street. Thomas said the purchase was made for investment purposes, stressing that Hermès has no current plans to move into the building, since Asprey’s lease is expected to run for another 30 years.
Hermès shares, which have risen 3.4 percent in the last 12 months, closed up 1.9 percent at 98.61 euros, or $146.50, Friday.