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Hermès Beats Estimates for First Half

·6-min read

PARIS Luxury’s star just keeps rising.

Hermès International is the latest player in the sector to release a stellar first-half performance this week on the back of pent-up demand for its products, outperforming analysts’ expectation on profits and margins.

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“We’d expected a rebound, a beautiful year, but I have to confess that the results have gone beyond our expectations,” said Hermès executive chairman Axel Dumas during a call with analysts after the results were published Friday morning.

Hermès reported a sharp sales uptick, driven especially by gains in Greater China and a rebound in the Americas, driving its first-half operating income up 221 percent to 1.72 billion euros. Compared with the same period in 2019, that represents a 50.5 percent increase. The company’s operating margin for the period was 40.7 percent — way ahead of the 34.8 percent number it reported for the first half of 2019.

“The pattern here is very similar — both in top-line and bottom-line dynamics — to the one we have seen in the [fashion and luxury goods] division of LVMH: top-line growth over the past two years as if COVID-19 never happened, and very materially higher EBIT [earnings before interest and taxes] margins,” Bernstein analyst Luca Solca said in a research note.

During the call, Dumas fielded requests for guidance on whether he thought the company’s high margins were sustainable for the remainder of the year.

“We don’t think bottom-up, we do things the right way, and that leads to a margin,” he said. “In recent years, we’ve seen a strong acceleration in growth of luxury broadly, which often has a leverage effect on our forecasts. The important thing is to continue investing and think four or five years down the road. I have to put a damper on some of your forecasts for 2021[…]. It’s way too early days, things can go both directions.[…] I say with great humility, these are high figures. The situation continues to be uncertain.”

While Hermès continues to anticipate high demand for its products in the months ahead, pressure on supply, currency effects and an expanded workforce — Hermès has taken on 400 new employees, two-thirds of them in France, since December — could weigh on results for the second half, the company said.

“In 2020, many of our customers weren’t able to go into our stores, so there was some inventory, end of 2020, in all geographies, that was quickly sold in the first half of 2021, so there is a catch-up effect in sell-through of inventory,” said Dumas.

For leather in particular, Hermès’ largest product category: “We’ve got production bottlenecks,” said Dumas. “We’ve continued investing in production capacity, we’re very much still in line with our medium-term strategy regarding leather, and this is why we do not expect to see the same growth rate for leather in the second half of the year.”

Hermès’ first-half sales jumped 70.2 percent year-over-year to 4.24 billion euros in total, representing a 28.9 percent gain versus the first six months of 2019. For the second quarter, revenues grew 119 percent to 2.15 billion euros.

With sales up 98 percent to 1.03 billion euros on a constant-currency basis in the first half (or 40 percent compared with 2019), the ready-to-wear and accessories division performed particularly well, as did the “other” Hermès sectors division — comprising jewelry and homeware — with constant currency sales up 100.4 percent, and watches up 120.6 percent on the prior-year period.

Sales of leather goods and saddlery gained 63 percent year-over-year at constant currency, to 2 billion euros. This was a 25 percent increase compared with the same period in 2019.

Constance III Mini - Credit: Courtesy of Hermes
Constance III Mini - Credit: Courtesy of Hermes

Courtesy of Hermes

For the silk and textiles business unit, sales grew 71.9 percent at constant exchange, and 5.8 percent versus 2019. Perfumes and beauty gained 64.5 percent, or 16.9 percent versus 2019.

While in Europe comparables were still negative on 2019 with a decline of 8.4 percent, in every other region, sales levels bypassed pre-pandemic levels.

“We see strong Chinese demand and appetite for our products,” Dumas said during the call. That demand — as well as acceleration in Singapore and Thailand — drove the firm’s business in Asia outside Japan in the first half. At constant currency, revenues in Asia grew 80.5 percent based on 2020 numbers and 58.5 percent compared with 2019, to 2.62 billion euros.

In Japan, the company outperformed its rivals, reporting a gain of 59 percent on last year and 22 percent versus the first half of 2019, despite restrictive measures introduced to fight the pandemic. Overall, the Asia-Pacific region accounted for more than half of Hermès’ sales in the first half.

Sales in the Americas grew 115.1 percent, or 25.3 percent on 2019, driven by strong performance in the U.S. “We are seeing new customers, quite young, who discovered Hermès in 2020 through e-commerce,” said Dumas, reporting that all of the house’s product categories are performing strongly Stateside.

The company gained significant traction online last year globally, recruiting new consumers to its offer. “With the reopening of the stores, the strong growth of the internet has continued,” Dumas observed.

Sales in the group’s own store network, which it has continued to expand and renovate, grew 81 percent year-over-year at constant exchange rates. Wholesale activities were up 46 percent on the same period last year, Hermès said, remaining penalized by travel retail.

Net income came in at 1.17 billion euros, up 250.4 percent year-over-year, or 55.7 percent based on 2019 numbers for the same period.

Looking ahead, the company continues to invest in building in-house production capacity and expanding its store network. Its leather workshop in Montereau, east of Paris, opened in June, and another, in Guyenne near Bordeaux, will start up in September. It invested 97 million euros in its production and divisions during the first half.

A further 97 million euros was spent on store expansions and renovations, including new stores in Omotesando, Tokyo and Troy, Mich.

“There’s been an acceleration in our investment plan for the coming years. As of the second half, we’ll see further investments in new jobs, in new logistics centers, the idea being to pave the way for 2022 and 2023,” Dumas said.

Earlier this week, LVMH reported net profit up 62 percent versus the first half of 2019 and a like-for-like sales gain of 14 percent for the second quarter. Kering’s first-half net profit was up 159.5 percent year-over-year and its revenues jumped 91.1 percent for the three months to June 30.

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