July 21, 2017 / 7:39 AM / a month ago

UPDATE 1-Luxury goods group Hermes sales growth slows in Q2

(Adds details from CFO call, shares, analyst )

By Dominique Vidalon

PARIS, July 21 (Reuters) - French luxury goods group Hermes said on Friday it expected first-half 2017 operating profitability to be close to the peak level of 33.9 percent of sales achieved in the first half of 2016, thanks to foreign exchange gains.

Hermes, known for its $10,000 Birkin bags and $400 printed silk scarves, made the forecast after sales growth slowed in the second quarter, broadly in line with expectations, and reflecting mostly challenging year-ago comparables.

Chief Executive Axel Dumas told a conference call that sales momentum remained "quite good" with sustained demand for Hermes' Birkin, Kelly, Constance and Lindy bags, robust demand for shoes, while the silk business continued to rebound.

"Everybody is quite optimistic for the future," he said.

In China, Hermes sales were still growing in double digits in the quarter, while Europe benefited from a rebound in tourist flows, which was particularly strong in Italy and in London thanks to a weaker pound, he said.

France was broadly flat, while growth in America also slowed due to high year-ago comparisons.

Hermes reported an 8.3 percent rise in revenue at constant exchange rates to 1.361 billion euros ($1.58 billion), compared with 11.2 percent growth in the first quarter. Analysts had forecast about 9 percent growth on average.

Sales growth at its leather goods division, which makes up 50 percent of group sales, slowed to 9.7 percent from the 15 percent rise achieved in the first quarter.

For full-year 2017, Dumas said he expected sales growth at the leather goods division to be close to its average annual growth of 10 percent.

The luxury industry has suffered in the past couple of years as demand in China slowed and attacks in France deterred some tourists from travelling to Europe.

A recovery in tourism in Europe and stronger Chinese consumption are expected to lead a rebound in the luxury sector this year, the Bain consultancy predicted in May.

By 0702 GMT Hermes shares gained 0.2 percent at 441.15 euros, having gained 13 percent so far this year.

RBC Capital markets kept a "sector perform" rating on the stock saying second quarter revenues yielded no surprises.

"Hermes remains the closest brand in our coverage to the 'perfect luxury paradox', simultaneously balancing characteristics like timeless, modernity, growth and high profitability," RBC analysts wrote.

"These strengths seem to us to be now properly reflected in its premium valuation at 34 times estimated 2018 P/E (price-earnings ratio), on our current numbers," they said.

Hermes said it was keeping an "ambitious" medium-term goal for revenue growth at constant exchange rates despite growing economic and geopolitical and monetary uncertainties.

$1 = 0.8595 euros Reporting by Dominique Vidalon; Editing by Leigh Thomas and Edmund Blair

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