Record profitability for Hermes after China-driven boom
The trend shows no sign of easing even as stock prices slump in the Asian nation
Paris — France’s Hermes on Wednesday said operating margins reached a first-half record at the start of 2018 as resilient demand in key markets such as China also helped the luxury handbag maker and most of its major rivals lift profits.
Top luxury labels from Louis Vuitton owner LVMH to Gucci-parent Kering are basking in a favourable sales environment thanks to buoyant appetite from Chinese shoppers, who account for about a third of the global sector’s revenue.
This momentum has yet to slow in spite of the trade spat between Beijing and Washington, and Hermes had reported robust revenue growth for the second quarter in July thanks to strong Chinese demand.
That remained the case, Hermes CE Axel Dumas told journalists on Wednesday, as the company posted a 6% rise in recurring operating income to €985m ($1.14bn) between January and June.
“There has not been any change in trend so far,” Dumas told journalists.
Recurring operating margins, which strip out the effect of one-off items such as the disposal of shops in Hong Kong, reached a first-half record at 34.5% of sales, up from 34.3% in the first six months of 2017 as it kept a lid on costs, including in communications.
Hermes has long had one of the highest profit margins in the luxury sector and its wares, including its famed Birkin bags, can sell for well over $10,000.
Like peers, the firm is now vying for attention from young shoppers and expanding e-commerce operations as well as gradually increasing production to meet demand.
Fears of a slowdown in Chinese had rattled shares across the sector in recent months.
Shares in Hermes, one of the most highly valued stocks among luxury players, are up 20% since the start of the year, and were up 2.25% by midmorning.
Luxury brands drew unwanted attention over their environmental credentials after Burberry disclosed that the value of products it destroyed reached a new high last year.
The British brand has since said it would no longer burn unsold goods — a practice long associated with premium brands keen to keep discounting to a minimum, though few give details.
Dumas said Hermes products were occasionally destroyed, though he added that the group avoided this as much as possible by recycling, organising sales for employees, and controlling stocks and production tightly.
“In terms of quantity, it’s very little,” he said.
Hermes’s hand-stitched handbags are known for generating long waiting lists and stocks of these are often scarce. The group also makes silk scarves, perfumes and clothing.
Asked whether Hermes would follow Burberry, Gucci or Italy’s Versace in dropping the use of animal fur in its collections, Dumas said the firm had not yet decided but that it was a “small player” in this field.