Hermès reports leather goods slow down

Capacity constraints hit the French luxury goods maker’s biggest divisions in the fourth quarter.
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Hermès announced sales of leather goods, its largest division, fell 5.4 per cent in the fourth quarter of 2021 as capacity constraints limited production. Shares fell 5 per cent in early trading.

Ready-to-wear and accessories, perfume and beauty, and watches offered gains, rising 31.8 per cent, 34.2 per cent and 36.6 per cent respectively in Q4. Leather goods and saddlery was the only division to report a decline in the quarter.

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“Demand is greater than our production capacity,” Hermès executive chairman Axel Dumas told analysts during the annual earnings call on Friday. “Obviously we had some constraints this year. Our leather goods are made 100 per cent in France. You know as well as I do the sanitary situation, with confinements, complicated childcare when schools closed.” Hermès stuck to its approach of both maintaining quality and limiting price increases to inflation by “only” 3.5 per cent, a move taken in January this year. “It’s something we are quite strict about compared with some industry practices,” Dumas said. Louis Vuitton recently increased its prices by more than twice that rate. “We have limited inflation, also because of our artisanal way of production. We are therefore less subject than others to the increase in energy costs or what have you.”

The leather good declines surprised the market. “It appears that some investors did not fully factor in the message from the company about capacity constraints and some others expected a special dividend,” wrote Antoine Belge, analyst at BNP Paribas Exane. “In addition, consensus revisions should be limited — notably compared to LVMH, Richemont and Kering recently. All of this could lead to some short-term pressure on the shares.”

Hermès total revenue rose 28 per cent in the fourth quarter of 2021 compared to 2019. Asia Pacific (excluding Japan) was the main growth driver (up 56 per cent), while Europe increased 11 per cent and the Americas 10 per cent. That pace is below the growth rates of some of the other megabrands in the US.

Overall, revenue growth at Hermès compares to larger rivals. Annual sales increased 33 per cent to €9 billion, compared to 2019. However, LVMH fashion and leather goods revenue grew 42 per cent and Kering luxury houses 18 per cent on an annual basis.

Dumas doesn’t see a change in demand trends so far this year. “For 2022, the impact of Covid-19 remains difficult to assess due to the evolutions in the different geographic zones,” he said. “In the medium term, despite the global economic, geopolitic and monetary uncertainties, the group confirms an ambitious objective of revenue at constant exchange rate.”

“The choice to increase prices moderately creates one of the highest untapped price increase reservoirs in the industry in sharp contrast to others, like Chanel,” wrote Bernstein Research analyst Luca Solca.

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