UPDATE 2-Hermes sales hit by weakness in Japan

Fri Jul 18, 2014 7:15am EDT

* Hermes Q2 sales growth 5.8 pct vs 10.1 pct in Q1

* Says H1 operating margin to be slightly lower vs H1 2013 (Adds details, CEO comments)

By Astrid Wendlandt

PARIS, July 18 (Reuters) - French luxury goods firm Hermes posted a slowdown in second quarter sales growth, hit by a slump in Japanese demand and adverse changes in foreign exchange rates.

Revenue growth at Hermes, known for its classic Kelly leather bags and printed silk scarves, slid to 5.8 percent from 10.1 percent in the first quarter.

Sales growth in Japan, one of its biggest markets, slowed dramatically to just 1.6 percent from 21.7 percent in the previous quarter when trading was boosted by price increases and advanced purchases ahead of a VAT hike on April 1.

Nonetheless, Hermes Chief Excutive Axel Dumas said he expected overall sales growth at constant currencies in Japan to reach 7 percent this year against 6.5 percent last year, and that it would continue to be steady after the anomaly of the first quarter comparisons.

In America, where business has been particularly buoyant in recent years, revenue growth slowed down to 7.9 percent from 17.9 percent in first quarter but Dumas said the slowdown was mainly due to a high comparative basis.

Eva Quiroga, luxury goods analyst at UBS in London, commented: "Growth in Japan and the United States was a little softer than expected."

Hermes told a conference call with analysts that tourist purchases in Europe remained soft but that it did not see a sales drop in Hong Kong - a top concern for luxury groups as the city is trying to restrict the entry of Chinese tourists.

Dumas said Hermes second-quarter sales in mainland China reached 16 percent at constant exchange rates.

Watch sales suffered, down 7 percent year-on-year at constant exchange rates in the first half and down 12 percent in the second quarter alone as retailers continued to keep stocks down in China. The country is trying to weed out corruption and watches have been a favourite gift for bribing officials.

Hermes said its leather goods division benefited from a ramp-up in production at new sites but sales growth from that unit stood at 13 percent overall in the first half, down from 15.5 percent in the previous three months.

The company flagged that its first-half operating margin, to be reported next month, would be slightly lower than a year earlier but close to the historical high of 32.4 percent reached over the full year in 2013.

Overall, second-quarter revenue reached 963.4 million euros ($1.3 billion) in the quarter to June 30, up from 943.5 million in the previous three months.

The year-on-year rise at constant currencies was 9.6 percent, against 14.7 percent in the previous quarter. ($1 = 0.7394 Euros) (Additional reporting by Pascale Denis; Editing by Sophie Walker)

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