Hermes sees risk from strong euro after record first half

Luxury goods maker Hermes cautioned on Thursday that a strong euro could hamper its ability to maintain record high profitability achieved in the first half as demand recovered.
Hermes and rivals such as LVMH and Kering have all started to see rising demand in mainland China and improving tourist spending in Europe, but the euro’s strengthening this year has raised concerns it could hurt the luxury sector’s recovery.
Hermes, known for its $10,000 Birkin bags and $400 printed silk scarves, said first-half operating income from recurring operations rose 13 percent to a record high of €931 million ($1.11 billion), as sales advanced by 9.7 percent.
Its operating margin hit a record high of 34.3 percent of sales in the first half, but CEO Axel Dumas said that performance may not be extrapolated to the full year and that a stronger euro could impact profits next year.
“We try to be ambitious but are cautious in a very volatile environment,” Dumas told reporters.
He said Hermes was fully hedged against a stronger euro for 2017, but his comments about the currency sent Hermes shares down 2.4 percent in mid-session trading, dragging down the shares of Kering and LVMH as well.
The euro is up sharply this year, partly reflecting an improving euro zone economy, but this has made products sold in the bloc more expensive for overseas consumers and tourists.
Hermes shares, which are up around 10 percent this year and hit a record high in April, trade at 35.6 times estimated 2018 earnings against 21.5 times for LVMH and 20.4 times for Kering.
“Hermes has a defensive stock status. Many market players buy the stock blindly, thinking it is too good to fail. The problem is that any slight change in the tone of its management or any piece of bad news can cost you dearly,” said Gregoire Laverne, fund manager at Roche-Brune Asset Management.
Laverne said Roche Brune did not own Hermes shares at present but it was a stock at which they were looking.
Hermes’ first-half operating margin was boosted by a rebound in the luxury goods industry, which had suffered in the past couple of years when demand in China slowed down and a series of deadly attacks in France deterred some tourists from traveling to Europe.
Richemont reported higher sales on Wednesday and Hermes’ Dumas said the fundamental business trends within the luxury goods industry remained positive.
Hermes said it was keeping an “ambitious” medium-term goal for revenue growth at constant exchange rates despite growing economic and geopolitical uncertainties.