Hermes revenue growth slows as China demand weakens
Hermes reported weaker-than-expected third-quarter revenue on Thursday, with sales rising 4.3 per cent year-on-year to €4.1 billion, below the 5.2 per cent forecast. Weak demand in China drove a 2 per cent decline in ready-to-wear and accessories sales, the first drop in years.
Birkin bag maker Hermes posted slightly weaker third-quarter revenue than analysts expected on Thursday as sales in its ready-to-wear and accessories division fell for the first time in years due to weak demand in key market China.
Hermes' miss, which follows LVMH's downbeat quarterly sales update earlier this month, looked likely to further unsettle investors about the company's resilience in the face of a wider luxury sector slowdown. Its shares fell 8 per cent in early trading on the Paris stock exchange, with Jefferies analysts saying in a note the results 'will likely make for a very painful day today.'
Quarterly sales rose 4.3 per cent year-on-year in currency-adjusted terms to €4.1 billion (HK$36.1 billion), slightly below an expected growth rate of 5.2 per cent from analysts polled by Visible Alpha. It was the weakest quarterly sales growth rate since early 2020, when Hermes had to shut down boutiques globally due to the pandemic.
Sales at Hermes' leather goods division, which makes its famous Birkin and Kelly handbags, rose 10.8 per cent, broadly in line with previous quarters. However, sales at the company's ready-to-wear and accessories division, accounting for over a quarter of quarterly sales, declined by 2 per cent from last year. Hermes finance chief Eric du Halgouet said the contraction was chiefly due to weak Chinese demand for high-volume accessories, while the division kept growing in all other regions.
Du Halgouet told journalists on a call that the Chinese market, Hermes' single-largest, was 'very difficult', but added he remained confident on long-term prospects and would keep investing in the country. 'As of the end of September, activity admittedly softened slightly in the third quarter, but it remains stable, which is still a significant feat in this very difficult market,' he said.
The company, by contrast, remained optimistic on trading in the United States, where it recently opened new stores in second-tier locations beyond the big coastal cities. All locations in the country and all product categories drove growth, du Halgouet said. Hermes shares are down 36 per cent since the start of the year.
Analysts have flagged a growing sense among investors that Hermes' historically high stock-market valuation, resulting from a decade of strong growth, may move closer to industry averages as the pace of its expansion is slowing. The brand's famous Birkin handbags have become more available on the second-hand market and so have lost some of their appeal, several resellers told Reuters, suggesting Hermes' scarcity-driven business model could be coming under pressure. The Birkin's desirability remains 'intact', du Halgouet said, adding the company would stick to its rhythm of increasing overall production volumes by around 6 per cent in the coming years.