Hermes Bucks Luxury Slowdown With Higher Sales But Flags Weakness in China — 2nd Update

By Andrea Figueras

Birkin handbag maker Hermes said sales rose as wealthy customers helped it to defy a global slowdown in luxury demand, even as it flagged signs of weakness in China.

The French company's second-quarter revenue was 3.7 billion euros, equivalent to $4.01 billion, a 13% on-year increase at constant currency. The result compares with analysts' forecasts of EUR3.67 billion, according to a poll of estimates compiled by Visible Alpha.

Hermes said momentum continued across all regions except for Asia, where store traffic in China, Hong Kong, Macau and Taiwan weakened. Despite softer trends, the company's sales in the Asia-Pacific region--which excludes Japan--rose 5.5% on year at constant exchange rates.

The results for the year-earlier period were boosted by the lifting of pandemic measures in China, and Hermes said the tough comparison base weighed on its performance in the region.

China--long a growth engine for the sector--is now facing a difficult macroeconomic environment, which has prompted some consumers to save money, hurting demand for luxury goods. Elsewhere, luxury sales have normalized after a postpandemic spending boom, though companies exposed to wealthier consumers have fared better than those that rely on less affluent customers.

Earlier this week, luxury behemoth LVMH reported results for the first half that missed analysts' expectations and posted a steep decline in sales from Asia outside of Japan. Gucci owner Kering warned it expects profit to keep falling in the second half as it pushes ahead with a revamp at its flagship brand.

Kering's results prompted share losses across European luxury groups and were the latest warning sign of waning demand in China, which was first flagged during the current results season by smaller peers Burberry Group, Swatch Group and Hugo Boss. Cartier owner Richemont also took a hit from subdued demand in China.

Analysts had tipped Hermes as one of the top performers in the luxury space, as it benefits from a wealthy customer base, strong pricing power and a more resilient business model than some of its peers. Italian luxury-fashion company Brunello Cucinelli exceeded expectations, helped by its high-end clientele.

"Luxury is cyclical and currently experiencing a downcycle, which historically lasts about one to two years," said Jelena Sokolova, a senior equity analyst at Morningstar. "This period could present a compelling opportunity for long-term investors to build exposure to these strong brands."

Hermes's recurring operating profit--a closely watched metric--jumped to EUR3.15 billion in the first half from EUR2.95 billion during the same months last year. Net profit grew to EUR2.37 billion from EUR2.23 billion.

Looking ahead, the company said it continues to anticipate revenue growth at constant exchange rates in the medium-term, but cautioned about global economic, geopolitical and monetary uncertainties.

As the third quarter starts to unfold, the company doesn't see major changes in trends seen in during the previous three months, Chief Executive Axel Dumas said on an earnings call.

Write to Andrea Figueras at andrea.figueras@wsj.com

(END) Dow Jones Newswires

July 25, 2024 13:45 ET (17:45 GMT)

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