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19-07-2012 08:47:00

Hermes Sales Growth Slows on European Weakness

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By Nadya Masidlover

PARIS--French luxury goods company Hermes International SCA (RMS.FR) Thursday posted another double-digit rise in quarterly sales, though growth slowed from previous stellar levels, and said it expects its operating margin to be close to its all-time high this year.

The release by the famous silk scarf and leather goods fashion house echoes figures reported by other European luxury retailers, which have also begun to feel the effects of an increasingly difficult business environment.

Last week, U.K.-based Burberry Group PLC (BRBY.LN) posted a significant slowdown in sales for the quarter through June, while France's LVMH Moet Hennessy Louis Vuitton SA (MC.FR) had already posted a deceleration in revenue growth in the first quarter of the year.

Hermes confirmed its annual sales guidance of 10% growth for 2012 and said the "underlying operating margin is expected to be between 2010 and the all-time high achieved in 2011."

In 2010 its margin was 27.8% and the record in 2012 was 31.2%.

In March, Hermes Chief Executive Patrick Thomas said the company's operating margin was likely to be hit by a strong rise in the cost of raw materials.

Hermes' sales for the second quarter rose 22% to 814.5 million euros ($1.00 billion) from EUR668.4 million a year earlier, beating analysts' expectations of EUR788.5 million.

At constant exchange rates, revenue rose 13% from a year earlier in the second quarter, down from the 18% growth reported in the first, as sales growth in France and Europe slowed.

In Asia-Pacific, excluding Japan--which represents about 32% of Hermes sales--revenue grew 27% at constant exchange rates. In Europe, excluding France, revenue increased 16%, as spending by tourists from emerging countries boosted European business.

Hermes' leather goods division reported a 7.4% rise over the period, while other products--which include John Lobb shoes and production for third parties--led organic sales growth, up 53%.

In recent years, the luxury sector's rising tide has been supported by consumer spending in emerging markets, notably China, allowing the industry to remain almost immune to the crisis. Yet as economic growth in China slowed in the first quarter to its weakest rate in about three years, analysts begun to question the sustainability of booming business in high-end goods.

Next week, investors will be watching closely for further signs of a slowdown in the industry as sector heavyweight LMVH and Gucci owner PPR SA (PP.FR) are both set to report sales for the second quarter on July 26.

Hermes shares closed Wednesday at EUR230. The shares have fallen around 9% in the past six months, underperforming the French SBF120 index, which has remained more or less stable over the same period.

Write to Nadya Masidlover at nadya.masidlover@dowjones.com

Order free Annual Report for HERMES INTERNATIONAL

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(END) Dow Jones Newswires

July 19, 2012 02:47 ET (06:47 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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