Hermes bounces back in China as margin hits record high

By Mimosa Spencer

PARIS (Reuters) -Sales at Birkin bag maker Hermes rose sharply in the second quarter, lifted by fast growth in Europe and the United States, and rebounding quicker than rivals in China after lockdowns eased in June.

Luxury retailers were hit hard by curbs on movement from mid-March in key Chinese cities such as Shanghai and Beijing, with most reporting an over 30% drop in quarterly sales in the country - a crucial market for the industry - earlier this week. LVMH and Kering remained cautious about the pace of recovery in China, the industry's main growth driver.

French leather goods company Hermes, which is also known for its silk scarves with equestrian prints, was more upbeat, saying that sales had grown in percentage terms by double digits in June and continued to perform well this month. The return of U.S. tourists to Europe also helped lift sales, the group said.

Overall revenues in the three months to June came to 2.7 billion euros ($2.76 billion), a higher-than-expected 19.5% rise at constant exchange rates, which strips out currency fluctuations.

Hermes also beat market forecasts by raising operating margins to a record 42% in the first half of the year, the highest level in the industry and a considerable achievement given that Hermes has in recent months raised prices less than competitors such as LVMH and Chanel.

The profit margin will come down in the second half of the year, however, as the company increases investments in e-commerce and advertising after events were curtailed in China during the COVID restrictions. Hermes is also raising salaries in Europe, executives told analysts in a conference call.

The group does not plan to further raise prices this year beyond an average of 4% already implemented to offset rising costs of raw materials and precious metals.

Luxury goods consumers have so far been brushing off the rising cost of living and concerns about a looming recession, but industry executives have all acknowledged that the outlook for the rest of the year is uncertain.

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 maintain 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 appeal as a luxury purchase more immune to fashion trends and economic crises than other products.

"This set of results confirms that Hermes is likely going to be the most resilient luxury goods player in a recession, and an appropriate hiding place for those seeking cover," said Luca Solca, luxury analyst at Bernstein.

($1 = 0.9793 euros)

(editing by Silvia Aloisi, Tomasz Janowski, Elaine Hardcastle)