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Hermes International’s profitability rose to record levels in the first half as the maker of the $10,000-plus Birkin bag became the luxury industry’s standout performer.

The French company’s shares soared as much as 9.6%, the biggest increase in more than two years, after it said its recurring operating margin reached a historical high of 42%, up from 41% a year earlier.

“This set of results confirms that Hermes is likely going to be the most resilient luxury goods player in a recession,” Luca Solca, analyst at Sanford C. Bernstein, wrote in a note, describing the performance as “fireworks.”

Hermes follows LVMH and Kering in posting strong results, showing the luxury consumer is resilient so far to high inflation and worries over a potential economic downturn. Sales have been hit by Covid-19 lockdowns in China, but that’s less of an issue for Hermes, given the months-long waiting lists for its bags. 

Executive chairman Axel Dumas told analysts Hermes isn’t seeing any signs of demand slowdown amid worries over the global economy, adding that the French brand would probably be one of the last luxury labels to be affected, as has been the case in the past.

Revenue rose 20% at constant exchange rates to €2.71bn (R45.5bn). Analysts had expected a gain of 13%.

Hermes’s diversification strategy has also helped the brand, which is historically known for its biggest leather goods and saddlery unit. In the second quarter, that division was the only one to grow by single digits. The watch division was the top performer with a growth rate of 49%, helped by the popularity of its Heure H model.

Price Increases

The brand, which had increased prices by an average of 3.5% in January for all its divisions, raises prices for its watches and jewellery unit by a range of 3% to 5% earlier this month amid rising costs for gold, Dumas told reporters.

Sales in China grew by double-digits last month after being hurt by virus restrictions and store closures in April and May, he added. That region saw the lowest growth rate for the period, in contrast to Europe, where France in particular got a strong boost from tourists, he added.

Hermes is confident about the demand trends so far this month in China, Dumas added.

The company is opening new production capacity on a regular basis in France in a bid to satisfy soaring demand. Hermes has five new workshops due to open in the next five years in its home country.

Hermes aims to boost output of bags and other leather goods by an average of 7% a year and is constantly having to recruit staff for its workshops, Dumas said. He told analysts it takes a craftsman about 15 hours to make a Hermes bag.

With inflation rising, Hermes gave a €100 gross monthly pay rise to its workers in Europe earlier this month. That follows a previous increase of the same amount for its workers in France earlier this year as well as an exceptional €3,000 bonus for staff worldwide paid in February.

The salary increases of July as well as planned communications spending and capital expenditure to expand output will probably mean that profitability won’t be as high in the second half as in the first, CFO Eric du Halgouet told analysts.

More stories like this are available on bloomberg.com


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