Hermes Fashions Help Fuel Growth Amid Production Constraints

Hermes International SCA, the French maker of Birkin bags, said sales of the latest fashion collections, accessories and fragrances contributed to growth in first-half earnings as it reiterated its forecasts for 2013.

Operating profit rose 14 percent to 584.1 million euros ($773.6 million), the Paris-based company said today in a statement, beating the 569 million-euros median estimate of seven estimates compiled by Bloomberg. The stock advanced as much as 3.6 percent, the most in more than a month.

Fashion and perfumes propelled revenue in the period as growth in bag sales was constrained by production capacity. To increase output, Hermes has been hiring about 200 craftsmen a year to add to the about 2,200 artisans working at the leather-goods division, said the unit’s head Guillaume de Seynes.

“Demand for Hermes products remains strong,” the company said. Full-year profit as a percentage of sales this year could be close to 2012’s record 32.1 percent, depending on currency movements, while revenue growth may exceed 10 percent at constant exchange rates, the luxury-goods maker repeated.

The company plans to add two production facilities in France devoted to “artisanal activities,” it said today. Each of the new production sites may employ up to 250 craftsmen when fully staffed, co-Chief Executive Officer Axel Dumas said at a press conference in Paris today.

Perfume Sales

First-half sales advanced to 1.77 billion euros, a gain of 11 percent, or 14 percent at constant exchange rates.

Perfume sales gained 20 percent at constant rates, helped by the introduction of the female fragrance Jour d’Hermes, while ready-to-wear and fashion accessories posted a 21 percent jump. Sales of leatherwork and saddlery advanced 10 percent.

The operating margin widened to 33.1 percent, boosted by the positive impact of currency hedges, Hermes said.

The lower yen may hurt profitability next year, and the company will try to mitigate that with “moderate” price increases in Japan, Dumas said.

Hermes has covered about 50 percent of its 2014 financial flows with currency hedges at this stage, Chief Financial Officer Eric du Halgouet said. If the yen remains at 130 per euro, Hermes’s Japanese unit will import products made in France at an extra cost of about 20 percent, and the company won’t be able to fully pass on the increase through customers, he said.

“That will have a negative impact on the profitability” of the Japanese unit in 2014, the CFO said.

LVMH Stake

The stock traded 2.7 percent higher at 255.05 euros at 1:34 p.m. in Paris, bringing the gain this year to 13 percent.

LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury-goods company, raised its stake in Hermes to 23.1 percent from 22.6 percent in the first six months of 2013. Hermes has called repeatedly for LVMH to reduce the holding it amassed starting in 2010 after converting cash settlement equity swaps.

France’s financial markets regulator fined LVMH 8 million euros in July for breaching disclosure rules. LVMH plans to appeal the ruling.

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