Hermes shares dive as sales and Chinese weakness disappoint
By Dominique Patton
Hermes Sales Performance and Market Reactions
PARIS, July 29 (Reuters) - Hermes shares sank 11% on Wednesday after the Birkin bag maker posted second-quarter sales growth in line with expectations but said buying in China, its biggest market, had yet to rebound.
Shares in the French luxury group closed at €1,509 ($1,717.39), their worst day in more than 15 years, cutting €19.7 billion off the company's market capitalisation.
Quarterly Sales and Profit Margins
Hermes said second-quarter sales of products including handbags, silk scarves and perfume rose by 6.7% in currency-adjusted terms to €4.1 billion, in line with expectations and slightly up from 6% growth in the first quarter.
While an operating profit margin of 41% was better than expected, the relatively modest sales improvement was likely to grab investors' attention, analysts said.
Analyst Perspectives
"The problem here is that the shares are trading at 38 times earnings, by far the highest multiple in the sector. And the earnings essentially didn't budge," said Jelena Sokolova, analyst at Morningstar.
Industry bellwether LVMH reported similarly muted results on Monday, although Gucci owner Kering positively surprised the market with better-than-expected results at its biggest brand Gucci, a sign CEO Luca de Meo's turnaround push is starting to work.
"We think investors will focus this morning on the top-line growth, and Hermes' slower pace of reacceleration vs peers," analysts at JPMorgan said in a note to clients.
Regional Performance and External Impacts
Middle East Crisis Dents Buying
Hermes, which carefully controls production and sales to maintain exclusivity, weathered the COVID-19 crisis better than peers, and had been the most resilient luxury group in a years-long industry-wide slowdown.
Nonetheless, growth fell below high single-digit percentages in the first quarter after conflict in the Middle East dented shoppers' appetite in markets from Dubai to Paris, weighing on shares, which are down 20% so far this year.
The impact of the conflict weakened in the second quarter, the group said on Wednesday, while growth in France increased by 6% from a drop in the first three months of the year.
Tourism and Domestic Trends
"In the second quarter, we are seeing improved momentum in our Paris stores," CEO Axel Dumas told reporters, adding that tourist traffic in the country had improved.
Heatwave conditions and wildfires have, however, deterred some tourists in recent weeks.
Dumas said question marks remained over both France and the Middle East in the second half and there was no sign of any rebound in China.
China and Asia-Pacific Market Weakness
In Asia-Pacific excluding Japan, Hermes' biggest region by sales, revenue grew at 2.5% in currency-adjusted terms, steady from the first quarter, but below the 3.3% expected in a consensus of analysts provided by Visible Alpha.
"I see the Chinese market stabilising, but I do not yet see a fundamental rebound," Dumas said, adding that despite the uncertain situation, he was happy with the result.
Product Division Performance
Leather Goods Division Grows 10%
Hermes, which caters to the ultra-wealthy with handbags costing more than $10,000, said the leather goods division that accounts for almost half its revenue grew 10% in the quarter, slightly below a consensus of 10.8%.
Dumas said the pace of growth should continue at around the same rate in future months.
"I see ... going forward the same tendency which at plus 7% is good," Dumas told analysts.
Investor Expectations
However investors are looking for more recovery, said Sokolova.
"The rest of the sector is kind of re-rating because markets are expecting recovery, and we do have early signs of the recovery happening here and there. But with Hermes, it's just kind of business as usual," she added.
($1 = 0.8773 euros)
(Reporting by Dominique Patton. Additional reporting by Alessandro Parodi; Writing by Lisa Jucca; Editing by Jan Harvey, Louise Heavens and Barbara Lewis)
