Hermes defies tough economy as Chinese snap up luxury handbags

Hermes International's quarterly sales jumped as Chinese shoppers snapped up its pricey scarves and Kelly handbags, fuelling optimism the global luxury industry's top performers will carry on growing despite economic headwinds.

Revenue climbed 23pc in the first three months of the year at constant exchange rates, Paris-based Hermes said Friday, exceeding analysts' estimates. The shares rose as much as 2pc in early trading, and have gained more than a third in 2023. "After a very good fourth quarter, we had robust traffic, even slightly higher in early 2023" in China, chief financial officer Eric du Halgouet told reporters Friday. Sales during the Chinese New Year were "very good," the company said.

The results come a day after LVMH, the world's largest luxury conglomerate, posted a double-digit sales increase, buoyed by the return of Chinese customers following the end of Covid restrictions. The persistent strength of LVMH and Hermes have made them darlings of investors at a time when even big technology companies have seen growth slow.

That's made LVMH Europe's most valuable company and its chairman Bernard Arnault the world's richest person, according to the Bloomberg Billionaires Index. Last week, Hermes' valuation crossed the symbolic threshold of €200bn for the first time.

Whether weaker luxury players such as Gucci-owner Kering will benefit as strongly as Hermes and LVMH from a resurgent Chinese shopper remains to be seen, analysts said.

Hermes' sales for Asia Pacific excluding Japan were up 22.5pc for the first three months of the year. The luxury label known for its silk carre scarves also saw 19pc growth in the Americas, a strong performance amid concern over a potential US slowdown.

Mr Du Halgouet said trends so far this month for both China and the US look similar to the first-quarter performance, adding that Hermes is seeing a "nice dynamic" in China while the brand hasn't seen a slowdown in the US so far.

"Growth for all regions and categories came in materially ahead of consensus," Stifel analyst Rogerio Fujimori wrote in a note Friday, adding that Hermes offers "best-in-class sector fundamentals."

While LVMH posted stellar quarterly growth in Asia excluding Japan, it warned it was seeing slower US growth.

Mr Du Halgouet said Hermes doesn't expect to see Chinese tourists return in droves before the fourth quarter. In the first quarter, Hermes saw the return of travel flows inside Asia with "very nice" performances in Hong Kong and Macau. He added that the company should benefit from easy comparables in the second quarter as China was heavily hit by lockdowns last year.

Hermes' ready-to-wear division saw the strongest growth, up more than a third. Its watch unit isn't experiencing a trend reversal after growing 25pc in the quarter, Mr du Halgouet added. Some top Swiss watch executives have warned of early signs of a slowdown.

Hermes may be in a category of its own as far as pricing power is concerned. Demand for its handbags typically surpasses its production capacity, and many bags also have higher resale values.

The company aims to open one new leather manufacturing facility per year in its home country in order to maintain growth of around 7pc for leather goods, executive chairman Axel Dumas said last week when Hermes opened a new facility in Louviers, Normandy. This opening brings the total of its leather plants in France to 21. The facility will boost the output of small Kelly bags which cost €7,700 in France.