Luxury market faces turbulence: Hermes

PARIS (Reuters) - Hermes (HRMS.PA) believes turbulence could hit the global luxury goods industry for the next two years and has put some expansion plans on hold, the French fashion and leather goods group said on Monday.

Watches and jewelry will take at least two years to recover from the current luxury spending downturn but fashion sales could pick up faster, Hermes Chief Executive Patrick Thomas told the Reuters Global Luxury Summit in Paris.

"In my opinion, turbulence will last rather long, maybe two years," Thomas said.

The world's second-largest luxury goods group in terms of market value behind LVMH (LVMH.PA) said it had postponed the opening of two shops in China and two leather goods plants in France.

As a result, it cut its investment budget to 160 million euros ($221.3 million) from 180 million initially, Thomas said.

But Hermes, known for its chic handbags and silk scarves, would still open eight shops this year, including in Dubai, Denver, Las Vegas, Istanbul, Brazil and two in China.

To help keep costs low, Hermes introduced a hiring freeze at its headquarters. While in the past it hired up to 200 leather goods craftsmen, it would hire between 50 and 100 this year to help meet demand, Thomas said.

There are waiting lists of several years for certain types of bags. Hermes handbags, which are all handmade in France, start at around 1,500 euros and can fetch more than 30,000.

LONG-TERM CONFIDENCE

Thomas said its stores continued to perform well, except in Japan, and that the wholesale business, which made up 20 percent of turnover, continued to suffer, particularly in the tableware and watch units, as retailers kept inventories low.

But the wholesale perfume business was starting to recover, he said, as stocks were starting to run out.

Thomas reiterated the group's target of flat sales for the current year at constant exchange rates. In turn, this would lead to a drop in the operating profit margin of "between 0 and 1 percentage point," compared with 25.5 percent last year.

While he expressed caution about the short-term, Thomas said Hermes remained confident it would return to its historical sales growth level of 10 percent at current exchange rates.

He said Hermes had not changed its advertising strategy but it had raised its budget by about 10 percent to over 100 million euros and planned to spend slightly more in China than in other countries.

Advertising represents about one-third of total communication costs, or 300 million euros.

Thomas added that the group was not looking for acquisitions as it was satisfied with its current internal growth rate.

Hermes shares were down 1.6 percent at 92.5 euros by 1416 GMT, while the overall Paris CAC 40 index .FCHI of blue-chips was down 1.7 percent.

($1=.7230 Euro)