Hermes Sales Trounce Estimates on Demand for Birkin Bags

  • Second-quarter sales beat analysts’ estimates on leather goods
  • First-half operating margin improved by 1 percentage point

Hermes International SCA solidified its status as the luxury industry’s go-to label, proving that customers are willing to ignore growing economic uncertainty and spend thousands of dollars on must-have leather handbags.

Sales rose 8.1 percent excluding currency shifts, Paris-based Hermes said in a statement Thursday. Analysts expected 5.6 percent growth. The first-half operating margin widened about 1 percentage point, helped by hedging on foreign exchange rates. The stock gained as much as 3.8 percent.

Hermes is increasing production of its signature leather goods, which have waiting lists that can run for more than a year, while many of its luxury peers are cutting back. The U.K.’s Burberry Group Plc, for example, is paring its product assortment by as much as fifth as it seeks to reignite demand. Hermes’s push shows the merits of promoting scarcity and not expanding too quickly, even in an upturn.

The quarterly performance “proves the desirability of our products,” Chief Executive Officer Axel Dumas said on a call with reporters.

Demand for Hermes’s Birkin and Kelly handbags, which can fetch more than $10,000, has held up even as luxury spending slows, while less well known models such as the Constance, Halzan and Lindy are also performing well, Dumas said. Sales of leather goods and saddlery, which account for about half of revenue, rose 17 percent in the quarter. The consensus was for growth of 13 percent, excluding currency swings.

Hermes’s “leather division saves the day again,” said Rogerio Fujimori, an analyst at RBC Capital Markets. The performance “is remarkable, given the difficult luxury backdrop.”

Despite beating internal expectations, Hermes repeated its forecast that revenue growth could be below 8 percent this year, excluding currency swings. First-half growth was 7.2 percent on that basis. Global luxury sales will expand at best 2 percent this year, the second weakest rate since 2009, consultant Bain & Co. estimates.

“In the current environment it’s always better to under-promise and over-deliver,” Fujimori said.

Store traffic hasn’t improved in France following terror attacks in the past year, meaning Hermes is relying more on local clientele, while demand is still subdued, particularly in parts of Asia, Dumas said.

Second-quarter revenue rose 6.2 percent to 1.25 billion euros ($1.4 billion). Analysts predicted 1.23 billion euros.

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