PARIS/MILAN French luxury giant Hermes (HRMS.PA) is to open fewer new stores over the next five years to protect its high-end image from over-exposure in a retail market where being one of the most exclusive brands seems to guarantee smooth sailing through global financial turmoil.
"Given risks of brand dilution, we must be prudent. We are going to significantly reduce our store openings to renovate and expand the existing stores," chief executive Patrick Thomas said on Friday after publication of the company's first-half results.
Hermes, which has 340 stores worldwide, still plans to open more stores in Middle East, Latin America and China but not in Europe, the CEO said. It targets a total of 350 to 360 stores in five years.
The French company belongs to the so-called "absolute" luxury sector, which is the most expensive and fastest growing in the luxury market thanks to demand from emerging markets, particularly China.
This segment currently accounts for 40 billion euros of the 191 billion euro luxury market, according to research from consultancy Bain.
Hermes, maker of 10,000-euro leather bags and silk dresses, in which the billionaire owner of rival LVMH (LVMH.PA) Bernard Arnault owns 22.3 percent, raised its annual sales growth target after reporting a double-digit increase in first half revenue and profits.
Hermes is now targeting 12 percent annual growth at constant exchange rates, up from a previous target of 10 percent.
Big-spending Asian markets like China, Singapore and Hong Kong contributed to the strong results. These markets defied slowdown fears by producing 25 percent sales growth in the first half. All product lines, from leather goods to jewelry and watches, grew at double-digit rates.
Thomas said that sales trends in July and August were in line with the first half.
Operating income increased by 22.2 percent in the first half to reach 510.9 million euros, or a 32.1 percent operating profitability, close to the performance achieved last year.
"A good and reassuring publication for Hermes," Cheuvreux analyst Thomas Mesnin said in a note, adding that concerns prompted by management earlier in the year about profitability did not seem to be justified.
In May, the CEO had told Reuters this year would be difficult because of turmoil in Europe.
Shares in Hermes rose above 2 percent on Friday, slightly outperforming a firmer French market .SBF120
But Hermes confirmed expectations that the operating margin for 2012 would likely fail to match its all-time high in 2011 as the group invests to develop its distribution network.
The retail-driven luxury industry is facing margin pressure because of unfavourable exchange rates and higher costs that companies can only partially pass on to consumers, especially in Europe.
Thomas said the group had not increased prices in Europe.
Analysts, however, expect luxury groups will ultimately have to raise prices in Europe, where Chinese can buy cheaper than at home, to boost sales and profits.
Cheuvreux said the company's guidance of a full-year operating margin between 27.8 percent of sales in 2010 and 31.2 percent in 2011 seemed conservative if compared with the 32.1 percent in the first-half. Cheuvreux has a current estimate of 31 percent.
Hermes said first-half net profit grew 28 percent, adjusting for a one-off gain from asset sales in 2011, to 335.1 million euros ($418.81 million).
Hermes sales rose 21.9 percent to 1.59 billion euros in the first half, up 15.4 percent at current exchange rates.
($1 = 0.8001 euros)
(Additional reporting by Lionel Laurent in Paris; Editing by James Regan and Jane Merriman)