Hermes says not affected by China's corruption crackdown

PARIS Thu Feb 13, 2014 12:25pm GMT

The Hermes logo is pictured on the new Hermes boutique before its unveiling on Rodeo Drive in Beverly Hills, California September 3, 2013. REUTERS/Fred Prouser

The Hermes logo is pictured on the new Hermes boutique before its unveiling on Rodeo Drive in Beverly Hills, California September 3, 2013.

Credit: Reuters/Fred Prouser

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PARIS (Reuters) - Hermes' (HRMS.PA) understated style is helping it weather a crackdown on corruption in China that has dented the sales of many rival luxury goods makers, the French company said on Thursday.

China's efforts to weed out illegal gift-giving has hit luxury watch makers and logo-branded products, such as LVMH's (LVMH.PA) Louis Vuitton and Kering's (PRTP.PA) Gucci products.

"There has been a very rapid evolution of Chinese customers' taste which means they increasingly look for discreet products and this has played in our favour," Chief Executive Axel Dumas told Reuters in an interview.

Dumas said of the Chinese government's fight against the deeply rooted custom of giving luxury presents to officials in exchange for favours: "We have not been affected by that movement."

The maker of 15,000 euro (12,261.09 pounds) Birkin bags and 500 euro printed silk scarves saw sales in mainland China rise 19 percent last year at constant currencies and 17 percent in the fourth quarter alone.

Dumas said men in mainland China, where officials are mostly men, continued to dominate demand, particularly for shoes and silks, and the brand's watch sales, which made up a small proportion of overall revenue, improved in the latter part of the year.

Overall, Hermes sales in 2013 were up 7.8 percent, or 13 percent at constant exchange rates, outperforming rivals such as LVMH (LVMH.PA), whose organic fashion and leather sales rose 5 percent during the same period.

On Wednesday, Italian fashion house Prada (1913.HK) said sales growth had slowed to 9 percent in the year ended January 31, from 29 percent in the previous year.

Shares in Hermes, Europe's third-largest luxury group by market capitalisation behind LVMH and Richemont (CFR.VX), were up nearly 1 percent by 1010 GMT, having lost nearly 9 percent since January 1.

SocGen said Hermes' growth was "consistently superior" to its peers, comparing its 13 percent full-year organic growth with a sector average of 6-8 percent.

Hermes commands one of the highest ratings among European luxury stocks due to the brand's resilience to swings in demand and expectations that LVMH, its largest external shareholder with a 23.1 percent stake, could make a takeover bid.

Its shares trade on a forward price-to-earnings ratio of nearly 30 times, against a sector average of about 16-17 times.

GUIDANCE UPGRADE

The French luxury brand said it expected its operating margin for 2013, to be published next month, to climb "very slightly above" last year's record level of 32.1 percent. Previously, it expected it to be close to that figure.

Dumas said the company had decided to lift its guidance on the back of stronger-than-expected sales in 2013, particularly towards the end of the year.

This month, he said Hermes was lifting prices by 10 percent in Japan, the brand's third-biggest market after France and the United States, to reflect the currency's weakness against the euro, adding that Hermes barely lifted prices in Japan in 2013, even though the euro gained 26 percent against the yen.

Hermes said fourth-quarter sales rose 11 percent, against growth of 12.9 percent in the third quarter, a slowdown Dumas blamed on a higher comparative basis in the period under review.

Sales rose 7.6 percent in France and 11.4 percent elsewhere in Europe, while they rose 4.7 percent in Japan and 8.5 percent in the Americas in the fourth quarter at constant currencies.

(Editing by Louise Ireland)

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