Hermès Rides Luxury Wave, Driven by Europe and Americas
PARIS — Hermès International came galloping out of the gate in the first quarter.
The French luxury house recorded a 27.1 percent rise in revenues at constant exchange to 2.76 billion euros in the three months to March 31. The results solidly beat analysts’ expectations with double-digit growth in Europe and the Americas.
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The gain outpaced the 15.4 percent consensus indicated by Bernstein, driven by strong performances of Hermès’ ready-to-wear, watches and “other Hermès” business lines, which include jewelry and homewares.
In Asia, despite the mid-March return of stringent health restrictions, including lockdowns in China, revenues continued to grow, buoyed by the solid first two months of 2022.
“[These results] confirm the year is off with a bang,” Luca Solca and Maria Meita, analysts at Bernstein, wrote in a research note.
Further, tackling production disruptions and constraints, as well as homing in on clienteling for local consumers contributed to making up for 2021’s “missed [fourth] quarter,” said Mario Ortelli, managing partner of strategic mergers and acquisitions advisory firm Ortelli & Co.
“The strong growth in sales at the beginning of this year reflects the desirability of our collections and the confidence of our customers in our artisanal and responsible approach,” said Hermès executive chairman Axel Dumas, in a statement.
The leather goods and saddlery division posted a 15.8 percent rise at constant exchange rates over the first three months of the year, also beating analysts’ expectations. Growth was based on the increase in production capacity and sustained demand, especially of the brand’s marquee models: the Birkin and the Kelly.
The importance of sustainability and the influx of new consumers with a focus on resale and collectible values are key factors in the sustained interest in the brand, Ortelli added.
As part of its “acceleration of strategic investments, recruitments and training” across all divisions, Hermès has continued to reinforce its leather goods production capabilities, with one new workshop opening planned this year in Louviers, France, and an additional four in the next five years. It is forecasting a 6 to 7 percent increase in production capacity in 2022 at the company’s 52 sites in France.
Watches performed strongly last year, with sales continuing on an upward trajectory, with a 62 percent increase.
At the Watches & Wonders trade show in Geneva earlier this month, La Montre Hermès’ chief executive officer Laurent Dordet credited attractive designs, the opening of e-commerce capabilities everywhere in the world and increased social presence for the success of that division, particularly in the U.S. and Asia.
Hermès will continue to reinforce its own store network, where sales rose by 28 percent, with online sales “strengthening” worldwide.
At constant rates, it reported 44.2 percent growth in the Americas, supported by “good momentum” in the U.S. and marking the reacceleration of business in the region at the end of March.
In Asia including Japan, the firm posted 19.3 percent growth, in a slide from last year’s 74.3 percent leap. A “very good Chinese New Year” and “sustained” activity in Thailand, Singapore and Australia countered some of the effects of tightening health restrictions that saw the closure of three stores in Shanghai and one in Shenyang, due to stringent lockdown measures.
In Europe, sales climbed 42.2 percent, due to a favorable comparison to early 2021, when results had been penalized by store closures because of an uptick in COVID-19 cases, and despite the war in Ukraine.
In early March, Hermès said it would be shuttering its stores and halting operations in Russia, in response to the country’s invasion of neighboring Ukraine. The company has three Russian boutiques, all in Moscow, although certain of its product categories, like fragrances, have significantly broader distribution.
While the direct impact of the ban on sales of luxury goods to Russia as part of sanctions against the government of President Vladimir Putin is expected to be limited, any enlargement of the area of conflict would have clear negative implications. “Not only from a geographic point of view, but also by increasing the anxiety level of consumers,” pointed out Ortelli.
The group continues to hold its medium-term “ambitious goal for revenue growth,” a position described by Bernstein as “cautiously confident on the future, as [Hermès’] results are less impacted by the situation in China compared to LVMH.”
Hermès’ numbers came a day after LVMH Mo?t Hennessy Louis Vuitton kicked off the earnings season with figures showing the U.S. driving luxury growth in the early months of 2022.
“This quarter has reaffirmed once more that top-of-mind brands take it all. Anyone in this elite club is significantly outperforming the market, but if you’re not [among them], you’re in trouble,” said Ortelli, noting that he expects to see the luxury market continue to grow.
LVMH reported on Tuesday a 29 percent rise in sales in organic terms during the first quarter, with the U.S. and Europe logging double-digit growth, while Kering will report first-quarter results on April 21. Compagnie Financière Richemont is due to report annual results on May 20.
Challenges of the coming quarters will hinge on the impact of China’s lockdowns, after an uptick in Omicron cases put paid to any easing of restrictions, and how robust the global economy will be, cautioned Ortelli, reminding that the spending habits of U.S. consumers in particular are strongly linked to economic cycles.
Following news that U.S. annual inflation in March hit a four-decade high of 8.5 percent, and European countries also logged record levels, prices will be particularly scrutinized after Dumas explained that increases reflected the rising costs of manufacturing after Hermès reported its annual results in February.
“We do not intend to use prices as a way of ratcheting up further growth. Our price is the genuine price,” he said at the time, discussing price increases that are likely to amount to 3.5 percent in 2022. Analysts expect higher material and transportation costs to have an impact in 2023.
“Top-of-mind brands can adopt a pricing policy that protects margins by putting [increasing costs] on the shoulders of consumers,” commented Ortelli, noting that luxury purchases were a “sticky habit” that saw some arbitrate spending decisions in favor of top-tier brands.
Other luxury brands like Chanel and LVMH-owned Louis Vuitton, Tiffany and Dior have also introduced price increases since the start of this year.
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