April 22, 2013 / 6:52 AM / 5 years ago

UPDATE 2-Hermes sees watch rebound after China slowdown drags

* Hermes Q1 sales up 12.8 pct vs 11 pct forecast

* Sees improved leather goods, watch sales later this yr

* No financial target for the year (Adds details, CEO comment, shares)

By Astrid Wendlandt

PARIS, April 22 (Reuters) - French luxury brand Hermes on Monday promised sales of leather goods and watches should improve later this year after growth undershot forecasts in the first quarter, partly depressed by a crackdown on gifts for Chinese officials.

Hermes, known for its 13,000-euro Birkin leather bags, generated first-quarter revenue of 856.8 million euros ($1.12 billion), up 12.8 percent at constant currencies, ahead of analysts’ expectations of 11 percent.

Much of the boost came from accessories such as belts and gloves, as well as shoes and ready-to-wear clothing, which together saw an 18 percent revenue rise in the first quarter.

But Hermes’s overall performance slowed from the same period last year when revenue rose 17.6 percent as growth in sales of leather bags roughly halved from the fourth quarter to 7 percent, a drop it blamed on lower deliveries from its workshops.

The company’s trading update is the latest sign that weaker demand from China and depressed consumer spending in Europe have triggered a slowdown in the luxury goods industry.

“It was a problem with deliveries as production was weak in January and February but our sales growth should stabilise to about 8-9 percent this year,” Hermes Chief Executive Patrick Thomas told Reuters in an interview.

Still, for comparison, sales at archrival LVMH’s fashion and leather arm were up 3 percent in the first quarter at constant currencies, down from 14 percent last year.

Hermes shares, which have gained 10 percent so far this year, were up more than 1 percent in morning trade at 251.95 euros.

Thomas said the company in January had raised prices by 3-4 percent on average on all products sold in the euro zone.

Hermes watch sales decline 5 percent, hit by a slowdown in the Chinese market, compared with a 27 percent surge in the same period a year ago.

“The depression is momentary,” Thomas said about the company’s watch sales, which he singled out as having been effected by the Chinese government’s crackdown. Watches have become a symbol of conspicuous consumption in China at a time when new president Xi Jinping has called for a renewed fight against corruption.

“We expect a revival at the end of the year,” Thomas added, though he gave no details on why sales would improve other than pointing to cyclical factors.

He said the Hermes’s investment in Swiss watch case maker Joseph Erard, which allowed it to lift its holding to 51 percent from 32.5 percent, was part of Hermes’s strategy to become more vertically integrated.

Asked if Hermes could also raise its stake in watch maker Vaucher from its current level of 25 percent, Thomas said: “We will raise it surely one day but we are not in a hurry.”

The company did not give a financial forecast for the year.

$1 = 0.7644 euros Reporting by Astrid Wendlandt; editing by Patrick Graham; Editing by Louise Heavens and Mark Potter

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