Hermes to Build Two Leather Factories as Demand Outstrips Supply

Hermes International (RMS) SCA, the French maker of Birkin bags and silk scarves, plans to build two leather factories in France in 2012 to cope with rising demand after third-quarter sales were hampered by capacity constraints.

The new plants will increase capacity by 20 percent when they’re fully operational in 2 1/2 years, Hermes Chief Executive Officer Patrick Thomas said today in an interview. The Paris- based company also plans to increase textile production in 2012, he said.

“There is nothing we can do by the end of the year,” Thomas said by phone. “Production capacity is not a short-term issue. It is a long-term thing so we do it step by step.”

Hermes raised its full-year targets today, saying in a statement that revenue may rise within a range of 15 percent to 16 percent at constant exchange rates. The new goal, revised from a growth estimate in August of as much as 14 percent, is contingent on the ability to meet higher demand during the year- end holiday season, the company said.

“Management is traditionally conservative and we already expect 18 percent revenue growth” in 2011, Rodolphe Ozun, an analyst at Bank of America Merrill Lynch with an “underperform” rating on the stock, wrote today in a report.

Hermes rose as much as 2.2 percent to 250.05 euros and was up 1.8 percent at 11:36 a.m. in Paris, valuing the bagmaker at about 26.3 billion euros ($36.4 billion).

Third-Quarter Sales

Third-quarter sales climbed 16 percent to 683.2 million euros, beating the 662 million-euro average of three analyst estimates compiled by Bloomberg. Stripping out the effect of currency fluctuations, sales advanced 18 percent.

Hermes joins luxury-goods makers including LVMH Moet Hennessy Louis Vuitton SA (MC), Burberry Group Plc (BRBY) and PPR (PP) SA in reporting quarterly sales that exceeded analysts’ expectations. Full-year current operating margin is expected to be “slightly” higher than in 2010, Hermes also said, an increase from an estimate in August of comparable profitability.

“We expect Hermes to remain one of the fastest-growing companies, even more in a challenging environment, thanks to its distinctive positioning,” Antoine Belge, a London-based analyst at HSBC Holdings Plc, wrote in a report this month. He has a “neutral” recommendation on the stock.

LVMH Stake

Hermes shares tumbled in September after a court rejected an appeal by minority investors who opposed a decision by the French market authority waiving rules to allow the bag manufacturer’s family owners to set up a holding company. The family sought the structure to protect Hermes against a takeover after LVMH built up what is now a 21.4 percent stake.

The new holding company “will be complete by Christmas at the latest,” Thomas said. LVMH “probably” owns more than 21.4 percent of Hermes stock, he also said, estimating Hermes’s freely traded shares at no more than 4.5 percent.

LVMH said in October that its shareholding in the bagmaker isn’t materially different from the 21.4 percent stake it declared in July.

Europe’s sovereign-debt crisis won’t have a major effect on Hermes’s sales this year, Thomas said.

“We might have a difficult 2012,” he said. “You have quite a few incentives to buy and not to buy and one of them is confidence.”

Hermes may raise some prices “at a reasonable level” in 2012 due to “significant” raw-material cost increases, particularly for silk, cashmere and crocodile skin, Thomas said. The company won’t increase prices where the local currency allows the company not to, he said, citing Japan.

Asia-Pacific Growth

Quarterly sales increased 34 percent in the Asia-Pacific region, excluding Japan, 22 percent in the Americas and 20 percent in Europe, excluding France, stripping out the effect of currency fluctuations, Hermes said. Revenue rose 3.2 percent in Japan and 5.4 percent in France on the same basis.

Sales of leather goods and saddlery, Hermes’s largest product category, advanced 10 percent, excluding currency moves. Apparel and fashion accessories revenue rose 32 percent, while silk and textiles sales gained 24 percent.

Hermes said it bought back 912,662 of its shares for 211.7 million euros during the third quarter.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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