March 22, 2017 / 7:06 AM / 3 years ago

Record profits at Hermes underscore luxury sector's upturn

PARIS (Reuters) - French luxury goods group Hermes (HRMS.PA) said it had started this year on a solid footing after announcing record 2016 profits on Wednesday, providing further evidence of a broader recovery in the luxury goods industry.

FILE PHOTO: The front of the Hermes store on Madison Avenue in New York, U.S., March 20, 2017. REUTERS/Shannon Stapleton/File Photo

Hermes, known for its $10,000 Birkin bags and $400 printed silk scarves, followed larger rivals LVMH (LVMH.PA) and Kering (PRTP.PA) - owner of Gucci and Yves Saint Laurent - in reporting an improvement in the sector although it was still cautious.

Chief Executive Axel Dumas said Chinese tourists were returning to Europe, but numbers were not yet back to previous levels, and many were favoring Britain and Italy “to the detriment of France”.

“We did better than we expected in 2016 and we are entering 2017 on a solid base but remain cautious in view of an uncertain environment,” Dumas told a conference call, after the group announced a 13 percent rise in 2016 net profit to 1.1 billion euros ($1.2 bln).

It increased its dividend by 12 percent although analysts at Bryan Garnier said there was some disappointment it did not pay out a special dividend. Its shares, which hit a record high this month, were down 0.5 percent at 426.20 euros in mid-session trading.

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

Hermes’s sales growth last year mainly stemmed from a strong performance at its leather goods arm, which makes up 50 percent of group sales.

Dumas did not give a detailed guidance for 2017. He said the group was looking at capital expenditure of between 280 million and 300 million euros, opening three stores in China, Brazil and Turkey and launching a new perfume. He ruled out following larger rivals LVMH (LVMH.PA) and Kering (PRTP.PA) into eyewear.

Hermes shares rose 25 percent last year and are up nearly 10 percent since the start of 2017, hitting a record high of 436.90 euros this month.

Analysts at CM-CIC Securities said they now looked expensive.

According to Thomson Reuters data, Hermes is trading on a price-to-earnings (P/E) ratio of 46 - while LVMH is on a P/E ratio of 25 and Kering is on 36.

Hermes said it was keeping an “ambitious” medium-term goal for revenue growth at constant exchange rates.

Several analysts expect the luxury goods sector to benefit this year from improved consumer sentiment in China, tax cuts under the new U.S. administration and robust Middle Eastern demand due to firmer oil prices.

Reporting by Dominique Vidalon; Editing by Sudip Kar-Gupta and Susan Fenton

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