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Asharq Al-Awsat
Asharq Al-Awsat
Lifestyle
Asharq Al-Awsat

Production Caps Curb Growth at Handbag Maker Hermes

Residents, wearing protective face masks, walk past a Hermes store in Paris, France, April 24, 2020. (Reuters)

French luxury group Hermes said sales grew by 11% in the fourth quarter of 2021, a touch below market expectations, as self-imposed production caps meant the group could not keep up with demand for its prized handbags.

The slowdown in growth from previous quarters, in contrast with an acceleration at other luxury groups, pushed the company's shares down 6.8% in early Friday trade.

They were heading for their worst day since September 2016 and trading at their lowest price in more than eight months.

Sales at Hermes' leather goods and saddlery division, which includes its famed Birkin and Kelly handbags and accounts for almost half of total sales, fell by 5.4% over the period, with the company citing capacity constraints.

"Hermes is one of the last large cap luxury stocks to report, and this does not quite echo LVMH, Kering and Richemont's recent results," said Citi in a report, adding investors could also be disappointed by the lack of a special dividend, which some had expected.

Hermes traditionally caps volume growth in its leather goods production at 7-8% annually, preferring to have long waiting lists for its products rather than accelerate production.

Executive Chairman Axel Dumas said the group had no plans to change its policy.

"It takes 15 hours for an Hermes bag. Even if there's a lot of demand, I’m not going to start doing them in 13 hours to raise production," Dumas told reporters. The group recruits around 400 artisans per year – but not much more given the time it takes to train them, he added.

Hermes said overall sales rose to 2.38 billion euros ($2.71 billion) in the three months to December, with US shoppers in particular driving growth. That compared with a consensus forecast for revenues of 2.53 billion euros and 12% growth at constant exchange rates cited by UBS.

Sales growth in the key holiday season at Hermes slowed down from the stellar pace seen in previous quarters, in contrast with the acceleration seen for most of the luxury sector.

That said, the group has weathered the COVID-19 pandemic better than many rivals, and its 2021 sales grew by 42% from a year earlier and by 33% from their pre-crisis, 2019 levels.

Revenues grew above their 2019 levels in all regions except for France, where business has been dented by the absence of deep-pocketed tourists.

Dumas said Hermes had increased global prices by 3.5% on average this year, above the usual increase rate of 1.5%, to reflect a rise in production costs in Europe, with regional price adjustments to account for currency fluctuations.

Given its hand-crafted production, Hermes is less exposed than rivals to increasing costs of energy and primary materials, Dumas said.

Rival Louis Vuitton, the world's largest luxury label, raised its prices by around 7% worldwide on Wednesday, citing higher manufacturing and transport costs.

The moderate price increases at Hermes compared to peers makes for "one of the highest untapped price increase reservoirs in the industry," said analysts at Bernstein.

Analysts say pricing power could emerge as a key driver of revenue growth for the top tier of the fashion and leather goods industry, following price hikes in 2021 and 2020.

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