French luxury giant of Hermès reported first-half results that fell below analysts’ expectations, as the widespread closure of stores due to the coronavirus pandemic sharply impacted its business and profitability. Hermès saw revenues plummet despite strong growth in mainland China and robust online sales. Its sales declined 41.3 percent to 982.5 million euros in the three months ended June 30, representing a drop of 41.5 percent in comparable terms.
Net income in the first six months of the year fell 55.6 percent to 335 million euros. Operating profit was down 53.2 percent to 535 million euros, with the operating margin sliding to 21.5 percent from 34.8 percent in the same period a year ago, weighed down by the fact that the company manufactures many of its goods.
The consensus forecast had been for second-quarter revenues of 999 million euros, an operating profit of 606 million euros, and an operating margin of 23.8 percent, Bernstein said in a research note. The news sent shares down 3.3 percent in midday trading on the Paris Stock Exchange.
Nonetheless, analyst Luca Solca noted Hermès outperformed its peers in the first half, with an organic sales decline of 24.9 percent that he qualified as “remarkable” given the circumstances. By comparison, sector leader LVMH Moët Hennessy Louis Vuitton recorded a 28 percent drop, while Kering was down 30.1 percent.
“Hermès confirms to be the most resilient player in the luxury goods space,” Solca wrote. “Brand traction and consumer desirability remain strong, positioning Hermès to get out of the crisis in good shape.”
Axel Dumas, chief executive officer of Hermès, also put a positive spin on the results in a webcast with analysts and reporters on Thursday. “Our industry is going through one of its worst crises. Personally, I think an operating margin of 21.5 percent is not bad,” he said. At LVMH, the operating margin stood at 9.1 percent in the first half, versus 21.1 percent in the same period a year ago, while at Kering, it fell to 17.7 percent from 29.5 percent.
Dumas noted that Hermès does 80 percent of its production in France, where it was forced to shut its factories for four weeks in spring, and where productivity remains lower than normal due to social-distancing measures designed to prevent the spread of COVID-19.
As reported, the company preserved the basic salaries of its employees without resorting to government aid. “We have been, I think, a good employer and a good partner to our suppliers, and that has a cost,” Dumas added.
At a time when many firms have frozen hiring, Hermès increased its workforce by almost 300 people in the first half, mainly in production. At the end of June, it employed 15,698 people worldwide.
The company maintained its guidance for ambitious revenue growth at constant exchange rates in the medium term. “For 2020, the impacts of the COVID-19 pandemic remain difficult to assess today due to the developments that are continuing in the various geographic areas,” Dumas said.
“We have seen a gradual improvement in business since the end of May, and the loyal clients, desirable collections, agile network and independence of the group are the pillars that give us confidence in the future and will support our recovery,” he added.
In a sign that things are gradually returning to normal in its domestic market, Dumas said Hermès plans to stage a physical show on Oct. 3 for its spring 2021 women’s ready-to-wear collection, after presenting the men’s line with a live online performance earlier this month.
Hermès hit a low point on April 20, when more than 75 percent of its store network was shut. The situation remains polarized, with retail sales — which account for 90 percent of its revenues — recording a double-digit increase in Asia-Pacific and Japan in June, while the U.S. and Europe continued to struggle.
“The trends we are seeing in July are in line with the second quarter, meaning they continue to improve from month-to-month,” Dumas said.
Revenues in Asia-Pacific, excluding Japan, fell by a relatively modest 9.1 percent in the second quarter. Sales were dragged down mainly by Hong Kong and Macau, and the travel retail portion of the business, but online sales recorded strong growth during the period, despite the reopening of stores.
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