UPDATE 2-Luxury demand lifts Hermes sales forecast

Tue Jul 19, 2011 12:48pm BST

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* H1 operating profit growth significantly higher than sales

* Q2 sales rise 22 pct at constant exchange rates

* Growth driven by China, United States

* FY revenue to grow 12-14 pct vs previous 8-10 pct forecast

* Hermes shares trading near record high

(Adds analyst comments, share price, CEO comment)

By James Regan and Pascale Denis

PARIS, July 19 (Reuters) - Hermes raised its 2011 revenue forecast on growing demand for its scarves, accessories and leather bags, in a reminder of its allure for rival LVMH , whose advances Hermes is trying to fend off.

Majority family owned Hermes has sought to defend itself from the threat of a takeover by LVMH, the world's largest luxury group, which has built up a 20 percent stake.

Speculation that Bernard Arnault, LVMH's controlling shareholder and France's wealthiest man, is intent on buying Hermes has sent its shares soaring in the last three months.

Hermes forecast a 12-14 percent rise in consolidated revenue at constant exchange rates for 2011 on Tuesday, ditching its previous range of 8-10 percent after a better-than-expected performance in the second quarter.

"Hermes is well positioned in a buoyant luxury goods market, delivering fast sales and earnings growth while maintaining its status as one of the most exclusive brands around," Cheuvreux analyst Pierre Lamelin said.

"The share is expensive but remains a special situation due to its shareholder structure." LVMH bought a 20 percent stake in Hermes in a surprise approach late last year, making it the company's largest outside shareholder.

Hermes fought back by setting up a family holding company aimed at presenting a united front against LVMH's advance.

Its shares have gained nearly 50 percent since mid-April, despite LVMH saying it has no plans to make a bid, while the broad French market has fallen over the same period.

The stock was little changed at 220.45 euros at 1131 GMT, near its 224.95 euro record high.

Hermes shares trade at 42 times expected earnings for 2012, by far the highest price-to-earnings ratio in the pricey luxury sector.

Sales in the three months to June 30 jumped by 22 percent at constant exchange rates to 668.4 million euros ($945.4 million), Hermes said, exceeding some analysts' forecasts of a growth rate closer to 14 percent.

The United States and China led growth, while even in Japan, whose economy was roiled by an earthquake in March, sales were stable, the company said. Hermes said it opened six stores during the first half, putting it on target for 10 by year-end.

CONSERVATIVE FORECAST

Luxury peer Burberry , which makes raincoats and leather goods, last week posted a forecast-beating 34 percent rise in revenue on a comparable basis for its first-quarter through June.

LVMH is set to report first-half results next week.

Hermes said it probably achieved significantly higher growth in operating profit than sales in the first half of the year, with a 4-5 percentage point rise in its pretax profit margin after it sold its stake in fashion house Jean-Paul Gaultier.

The company said its underlying full-year operating margin would be close to last year's level of 27.8 percent.

Hermes is due to report first-half earnings on Aug. 31.

Credit Suisse analyst Rogerio Fujimori said in a note that Hermes' full-year sales forecast still seemed "conservative".

Chief Executive Patrick Thomas said sales would slow in the second half because inventories had reached very low levels, adding that Hermes would build a further leather goods production site next year to meet demand.

Asked about LVMH, Thomas said he was confident the family's move to create a holding company owning the majority of Hermes but exempt from making a full takeover offer would overcome a court challenge from French small shareholder group Adam.

A ruling is due on Sept. 15.

($1=.7070 Euro)

(Additional reporting by Blaise Robinson; Reporting by James Regan and Pascale Denis; Editing by Christian Plumb and Leila Abboud)

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