Hermès Maintains Its Double-digit Pace

25 Jul 2024

Hermès International raced ahead of its luxury peers once again, riding a “flight to quality” in the U.S. and China to achieve an 11.5 percent gain in revenues in the second quarter to 3.7 billion euros.

At constant exchange rates, the increase stood at 13.3 percent, and the double-digit pace was maintained in all regions, demonstrating how higher-end brands are better resisting the global slowdown in luxury spending.

The results handily beat forecasts. HSBC had forecast second-quarter organic sales growth of 10.7 percent and first-half EBIT margin of 42 percent.
Still, momentum at Hermès is weakening, as sales in the first quarter were up 17 percent at constant exchange rates.
Like other luxury players, Hermès came up against tough comps, a downturn in mall traffic in Greater China, and substantial currency headwinds. It tallied the negative impact of exchange rates at 207 million euros in the first half.
Partly reflecting the flight from luxury of aspirational consumers, sales of silk and textiles fell 5.6 percent in the second quarter, and watches sank 4.9 percent.

Bernstein luxury analyst Luca Solca applauded the robust gains in the brand’s most iconic categories, with leather goods logging 17.9 percent organic growth, and ready-to-wear and accessories improving 15.1 percent.

Among standout handbag styles were the Della Cavalleria Elan, and a studded, miniature version of its famous Kelly.

Hermès chief executive officer Axel Dumas characterized the second-quarter results as solid, and highlighted continued dynamism in the American market, which advanced 13.3 percent. “When there are tougher times, there’s a flight to quality,” he told a webcast Thursday evening after the results were released.

Similarly, he said Chinese consumers are “looking for high-quality products, which is good for us.”

What’s more, “they don’t necessarily want the logo to be affixed to what they buy. And so there is this change, which we believe is underway, and is also positive for us.”

Second-quarter revenues at constant exchange rates gained 19.5 percent in Japan, 18.2 percent in Europe, 5.5 percent in Asia Pacific and 99.4 percent in other regions, primarily the Middle East.

Hermès credited local clients, not bargain-hunting Chinese consumers, for the gains in Japan, where it opened two new stores in the first half.

Meanwhile, business in European stores is being pumped up by flush tourists from China, the Middle East and the U.S.

Dumas said trends remain unchanged in the first weeks of July and sounded a sanguine note about the balance of the year.

“Hermès is resilient and solid in the face of a complex and challenging environment. We are forging ahead with confidence and humility,” he said, seated next to chief financial officer Éric du Halgouët, broadcasting from the brand’s airy boutique on the Rue de Sèvres.

Net income in the first half advanced 7 percent to 2.38 billion euros, whereas profits plunged by double digits at luxury rivals LVMH Moët Hennessy Louis Vuitton and Kering.
Bernstein’s Solca noted the EBIT margin at Hermès remains the highest in the industry, and just 50bps lower than anticipated.

At the revenue level, organic sales at LVMH key fashion and leather goods division rose 1 percent year-on-year in the three months to June 30, while group revenues at Kering fell 11 percent in the second quarter, both in reported and comparable terms. (Sales at Kering’s linchpin Gucci brand plummeted 19 percent.)

The poor second-quarter results have dragged on luxury stocks. Shares in Kering fell 7.5 percent on Thursday, while LVMH slipped 1 percent and Compagnie Financière Richemont lost 1.7 percent.

On Thursday, Hermès said it would continue to invest strongly in its production capacity, communications and store network, with expansions in the pipeline for boutiques in Atlanta, Singapore, Shenzhen, China, and Lille, France.

Four leather goods workshops are currently under construction in France, with the first coming onstream this fall, and the others opening over the next three years.