Hermes Raises 2010 Sales Growth Forecast, Expects Higher Operating Profit

Hermes International SCA, the French maker of luxury handbags and silk scarves, raised its 2010 revenue forecast after second-quarter sales increased faster than analysts estimated on demand in Asia.

Full-year revenue may grow as much as 12 percent, excluding currency swings, Paris-based Hermes said today. The 173-year-old company in March forecast revenue would gain at least 5 percent.

Demand for luxury goods is accelerating as Chinese shoppers buy more high-end clothing and accessories, and U.S. and European retailers replenish inventories after the recession. Hermes sales gained 23 percent in the first half and the company said operating profit rose at a faster pace, helped by growth in high-margin products such as textiles, leather wear and watches.

“The second-quarter was quite significantly better than I had expected,” said Dennis Weber, an analyst at Evolution Securities in London. “The surprise was driven by a better- than-expected performance in Hermes’s own store network, which showed underlying growth of 20 percent,” he said.

Hermes gained 4.15 Euros, or 3.6 percent, to 118.95 Euros at the 5:30 p.m. close of trading in Paris. The stock has risen 27 percent this year, giving the company a market value of 12.6 billion Euros ($16.2 billion).

Second-quarter sales rose 27 percent to 567 million Euros, compared with the 533.3 million-euro average estimate of six analysts surveyed by Bloomberg. The maker of Birkin and Kelly bags reports first-half results on Aug. 31.

Wider Margins

Over the year, the operating margin is expected to widen by at least 1 percentage point compared with 2009, depending on currencies, Hermes said.

“The margin increase is coming partly from the currency and partly from the product mix,” Chief Executive Officer Patrick Thomas said in a phone interview.

The pace of sales growth in the first six months won’t be sustained in the second half, Hermes said in the statement. The second quarter was beyond expectations, leading to the higher full-year sales growth target, the company said. The target doesn’t take into account economic factors that could significantly alter the business environment, Hermes also said.

That Hermes cannot sustain the first-half growth over the year “is not at all disappointing,” said Antoine Belge, an analyst at HSBC in Paris, who has a “neutral” rating on the shares. “It’s still very robust.”

Silk Ties

Second-quarter revenue jumped 57 percent in Asia, excluding Japan, where sales gained 10 percent, Hermes said. Sales increased 20 percent in Europe and 36 percent in the Americas. Hermes plans to open or renovate about 20 stores this year, including a new boutique on Rue de Sevres in Paris.

Sales of leather goods increased 32 percent, while revenue from silk ties and scarves gained 24 percent, Hermes said. Apparel sales climbed 26 percent. Revenue rose 36 percent for watches and 17 percent for perfumes. Sales of both product lines were hurt last year as third-party distributors ran down inventories. Tableware sales slipped 2.2 percent.

Sales of apparel, accessories, fragrances and watches will probably recover this year, particularly in the company’s own stores, CEO Thomas said in March. Leather items as a percentage of sales will fall to 45 percent, he said.

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