Birkin bag maker Hermes reopens China stores but business yet to recover

By Silvia Aloisi

MILAN (Reuters) - Birkin handbag maker Hermes <HRMS.PA> said on Wednesday it was seeing a gradual return to normality in China, with just four of its 43 stores on the mainland and areas like Hong Kong and Macau still closed due to the coronavirus outbreak.

But Hermes CEO Axel Dumas said that despite shops reopening, store traffic in greater China had yet to recover from the fallout of the health scare, which is now spreading beyond Asia.

Luxury goods companies such as Hermes are facing a sales hit from the outbreak as they have had to shutter shops in the world's second-largest economy, while fewer Chinese tourists have been travelling during the Lunar New Year holiday.

Chinese shoppers account for a third of the luxury goods industry's customers.

"Until 10 days ago we were in a situation of closing stores, now we are in a situation of re-opening them," Dumas said, in stark contrast to more gloomy comments from rivals.

"We are seeing a potential return to normality in greater China, at the operational level. Store traffic though has not returned to normal at all."

Hermes, traditionally regarded as particularly resistant to downturns, has long been one of the steadiest performers in the luxury goods industry, in part due to its careful management of production and stocks, which have helped to promote its aura of exclusivity.

Its coveted $10,000 plus Birkin handbags tend to generate waiting lists, and can sometimes increase in resale value, adding to their attraction as a luxury purchase that is more immune to fashion trends and economic crises than other products.

Dumas said the four stores that remain shut in greater China compared with a total of 15 shops that were forced to close at one stage during the crisis. He also said it was too early to estimate the impact of the disease on group sales.

Last year, the French company, also known for its silk scarves, relied on the Asia-Pacific region, excluding Japan, for 38% of its revenues. Dumas said it had not put on hold investments because of the crisis.

In contrast, Gucci-owner Kering <PRTP.PA> said on Feb. 12 it had shut half of its stores in China, and shelved new openings and advertising campaigns there.

Around 80% of Hermes' manufacturing capacity is based in France, so the company was not suffering from disruptions to its supply chain because of the health scare, Dumas said.

But with the disease spreading outside Asia, the full impact of the outbreak has yet to emerge. Hermes shares were down 0.6% as European shares fell to a near four-month low on concerns about the scale of the epidemic.

"For us there are two issues: the lower number of Chinese tourists and the local impact in the countries where the virus is spreading," Dumas said.

He said neither of the group's two production sites in Italy, the European country with the biggest number of coronavirus cases, had been shut so far and its shop in Milan's posh via Montenapoleone was open.

Since the weekend, Italy has taken drastic steps to contain the virus, closing schools, cinemas and entertainment places and cordoning off towns in Lombardy and Veneto. On Wednesday, France reported a second person had died from the disease.

Hermes posted a slowdown in sales growth in the fourth quarter of 2019 to 1.87 billion euros ($2.03 billion), hit by protests in Hong Kong and the impact of a sales tax increase in Japan.

That was up 10.7% at constant exchange rates, broadly in line with analyst expectations, and compared with sales growth of 15% in the third quarter.

(Editing by Sarah White/Louise Heavens/Jane Merriman)