Hermes to lift prices because of leather and silk

France
Published:  01 September, 2013

French luxury brand, Hermes plans to raise prices next year, partly in response to the rising cost of silks and leather, the French luxury group said on August 29 as it posted forecast-beating first-half profits.

Hermes, the maker of 6,000-30,000 ($8,000-$40,000) Birkin and Kelly bags, is hiking its prices after increases by its rivals such as LVMH's Louis Vuitton and Kering's Gucci earlier this year.

Like its peers, Hermes said that as well as countering rising raw material costs, the move was aimed at mitigating currency fluctuations such as the weak yen compared with the euro.

Japan accounts for almost a fifth of sales for Hermes, which has the most exposure to the country of any European luxury goods maker, according to brokers such as UBS.

"You can indeed expect price increases, which as always we want to be moderate," said Axel Dumas, who will take over from Patrick Thomas as chief executive of the company when he retires next year. Dumas did not give details.

Hermes posted a 14% rise in first-half operating profit to 584.1 million ($772 million), thanks to strong demand for its leather and silk accessories, giving the group a margin of 33.1%.

According to Thomson Reuters, Hermes was expected to post a profit of 570 million euros.

Hermes also confirmed its 2013 recurring operating margin could be close to the 2012 record of 32.1%.

The company said it achieved the increase in sales and profits through higher volumes after it decided not to hike prices at the start of this year.

Last month, Hermes reported a forecast-beating 16% rise in second-quarter sales at constant exchange rates thanks to strong demand for its leather and silk accessories, marking an improvement from a 12.8% rise in the first quarter.

At that time, it said it was getting closer to reaching last year's record operating margin level, having previously predicted a fall.

It also forecast that full-year sales growth would slightly exceed its mid-term growth target of 10% and recurring operating income would increase slightly faster than revenue.

Hermes reiterated the sales forecast on August 29, adding that net cash stood at 596 million at the end of June.

Last month, industry leader LVMH and Kering published strong growth figures, but pointed to weakness in China.

Hermes is faced with a dwindling supply of calf leather - its No.1 raw material - because supply is driven by meat traders who are responding to a drop in consumer demand for veal and thus rearing and slaughtering fewer animals.

Meanwhile, demand for luxury leather goods is still growing and forcing the price of quality hides up 20-30% a year.

Source: Reuters

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