Hermes Sees Lower Profitability This Year as Weak Yen Weighs

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Customers wait in line to enter an Hermes store, operated by Hermes International SCA, in the Tsim Sha Tsui area of Hong Kong, China. Close

Customers wait in line to enter an Hermes store, operated by Hermes International SCA,... Read More

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Photographer: Lam Yik Fei/Bloomberg

Customers wait in line to enter an Hermes store, operated by Hermes International SCA, in the Tsim Sha Tsui area of Hong Kong, China.

Hermes International SCA, the French maker of Birkin bags and silk scarves, said it expects profitability to shrink this year from a record in 2013, weighed down by the weakness of the Japanese yen.

The company won’t be able to fully pass onto customers the increased cost of selling products in Japan, where a consumption tax is also due to rise next month, Chief Executive Officer Axel Dumas said today at a presentation in Paris. The yen has declined about 13 percent against the euro in the past year.

Operating profit as a percentage of sales will be more than 27 percent in 2014, Dumas said. The measure widened by 0.3 percentage points to 32.4 percent in 2013 as Hermes sold more high-margin clothing and accessories, the company said earlier.

Hermes, whose handbags can sell for about $10,000, raised prices 10 percent in Japan, about 4 percent in Europe and between 6 percent and 7 percent in the U.S. earlier this year, Dumas said. He declined to give a forecast for revenue growth.

“We are very confident, yet prudent,” said Dumas, who replaced Patrick Thomas as sole CEO this year. He also said he wasn’t concerned about the impact of possible sanctions on sales to Russians, whom he estimated account for less than 5 percent of revenue. If wealthy Russians can’t travel abroad because of the crisis in Crimea, they will spend at home, Dumas said.

Photographer: Balint Porneczi/Bloomberg

Buildings are seen reflected in a Hermes store window in Paris. Close

Buildings are seen reflected in a Hermes store window in Paris.

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Photographer: Balint Porneczi/Bloomberg

Buildings are seen reflected in a Hermes store window in Paris.

Operating profit last year rose 8.9 percent to 1.22 billion euros ($1.69 billion), Hermes said today in a statement. Earnings matched the average of 12 analyst estimates compiled by Bloomberg. Revenue rose 7.8 percent to 3.75 billion euros, led by growth in Asia outside Japan, and America.

Elitist Appeal

Hermes is weathering a slowdown in luxury-goods consumption better than many of its peers as production constraints and controlled distribution reinforce its elitist appeal. The company, which added 900 jobs last year, has said it plans to create two new leather-goods premises in France to help catch up with demand that remains strong.

Hermes “has the benefit of excess demand, waiting lists” and fewer stores than competitors, Luca Solca, an analyst at Exane BNP Paribas, said in an e-mail. Given the limited amount of freely traded shares, “the main interest today would be as a read-across to other names in the sector,” said Solca, who has a neutral recommendation on the stock.

Hermes shares dropped 0.6 percent to 236 euros at 3:54 p.m. in Paris. They have fallen about 10 percent this year, valuing the saddle-maker, part-owned by billionaire Bernard Arnault’s LVMH Moet Hennessy Louis Vuitton SA, at 24.9 billion euros.

“Hermes will continue its long-term strategy,” which includes expanding its distribution network and protecting supply sources, the company said. It will open or renovate about 20 shops this year, including a fifth “maison” store in Shanghai, which will open in September, Dumas said.

Net income increased 6.8 percent in 2013 to 790 million euros, Hermes said. The company proposed raising its full-year dividend to 2.70 euros a share from 2.50 euros last year. The amount includes a 1.50-euro interim dividend paid in February.

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

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Thomas Mulier, Paul Jarvis

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