Breaking News

Production caps curb growth at luxury handbag maker Hermes

The logo of Hermes is seen on a store in Paris, France, April 24, 2020. REUTERS/Charles Platiau

Register now for FREE unlimited access to Reuters.com

  • Q4 sales up 11% vs forecast increase of 12%
  • Q4 leather goods, saddlery sales down 5.4%
  • Shares drop as much as 7%

PARIS, Feb 18 (Reuters) – Sales growth at Hermes eased in the final quarter of last year, missing market forecasts and sending its shares down as much as 7%, as self-imposed production caps kept the group from meeting demand for its prized handbags.

The slower revenue increase in the key holiday period, in contrast with an acceleration at other luxury groups, put Hermes, one of the industry’s strongest names, in the unusual position of underperforming rivals.

“Hermes is one of the last large-cap luxury stocks to report, and this does not quite echo LVMH, Kering and Richemont’s recent results,” Citi said in a report.

Register now for FREE unlimited access to Reuters.com

Investors could also be disappointed by the lack of a special dividend, which some had expected, it added.

Hermes shares fell 5% by 0920 GMT on Friday, having fallen as much as 7% earlier, for their worst day since September 2016 and their lowest price in more than eight months.

Sales at Hermes’ leather goods and saddlery division, which includes its famed Birkin and Kelly handbags and account for almost half the total, fell by 5.4% over the period, with the company citing capacity constraints.

Hermes caps volume growth in its leather goods production at 6% to 7% annually, preferring to have long waiting lists for its products rather than accelerate production – and Executive Chairman Axel Dumas said the group had no plans to change that.

“It takes 15 hours for an Hermes bag. Even if there’s a lot of demand, I’m not going to start doing them in 13 hours to raise production,” Dumas told reporters.

The group recruits about 400 artisans per year – but not many more, given the time it takes to train them, he said.

“Contrary to what people may think, we’re always very sad when we have to say to our customers, ‘No’, because we don’t have that,” he said, adding that the group had considerably run down stocks last year.

Overall sales rose to 2.38 billion euros ($2.71 billion) in the three months to December, with U.S. and Chinese shoppers driving growth.

That compared with a consensus forecast for revenues of 2.53 billion euros and 12% growth at constant exchange rates cited by UBS.

The 11% increase compares with growth of 31% in the third quarter and 127% in the second. The group’s profitability margin also eased in the second half of the year to 38.1%, analysts said.

That compared with a margin of 41% for rival LVMH’s fashion and leather goods division, led by Louis Vuitton and Dior, and 38.2% for Kering’s top brand Gucci.

Still, Hermes has weathered the COVID-19 pandemic better than many rivals, and its 2021 sales grew by 42% from a year earlier and by 33% from 2019 levels.

Revenues exceeded their pre-pandemic levels in all regions except France, where business has been dented by the absence of deep-pocketed tourists.

Dumas said Hermes had increased global prices by 3.5% on average this year, above the usual rate of 1.5%, to reflect a rise in production costs in Europe, with regional price adjustments to account for currency fluctuations.

That is below rivals’ more aggressive price increases, such as an average hike of 7% worldwide by Louis Vuitton this week.

Dumas said Hermes would not increase prices to boost its results. Given its hand-crafted production, Hermes is less exposed than rivals to increasing costs of energy and primary materials, he added.

($1=0.8796 euros)

Register now for FREE unlimited access to Reuters.com

Reporting by Mimosa Spencer and Silvia Aloisi;
Editing by Mark Potter and Clarence Fernandez

Our Standards: The Thomson Reuters Trust Principles.

https://www.reuters.com/business/retail-consumer/production-caps-limit-hermes-sales-growth-q4-2022-02-18/