Hermes revenue growth slows as Chinese consumers cut spending on accessories

By Tassilo Hummel and Alessandro Parodi

PARIS, Oct 22 (Reuters) - Birkin bag maker Hermes posted softer third-quarter revenue growth than expected on Thursday as sales in its ready-to-wear and accessories division fell for the first time in years due to weak demand in key market China.

Hermes' miss, which follows LVMH's downbeat quarterly sales update earlier this month, looked likely to further unsettle investors about the company's resilience in the face of a wider luxury sector slowdown.

Shares in the French brand slid 5% in early trade.

Hermes finance chief Eric du Halgouet told journalists on a call that the Chinese market, Hermes' single-largest, was "very difficult", but added he remained confident about long-term prospects and would keep investing in the country.

Quarterly sales rose 4.3% year-on-year in currency-adjusted terms to €4.10 billion ($4.6 billion), slightly below an expected growth rate of 5.2% from analysts polled by Visible Alpha. The results marked Hermes' weakest quarterly sales growth rate since early 2020, when it had to shut down boutiques globally due to the pandemic.

Sales at Hermes' leather goods division, which makes its Birkin and Kelly handbags, climbed 10.8%, broadly in line with previous quarters. However, sales at the company's ready-to-wear and accessories division, accounting for over a quarter of quarterly sales, declined 2% from last year.

Du Halgouet said the contraction was chiefly due to sluggish Chinese demand for high-volume accessories, while the division kept growing in all other regions. Ready-to-wear alone was up on the quarter, even when including China, he added.

Accessories include items such as gloves, hair clips and belts – an important product category for Hermes because they often allow less wealthy shoppers make their first purchases with the brand.

UPBEAT ABOUT US BUSINESS

Chinese consumers, who account for roughly a fifth of global ​luxury purchases, were long the driving force behind the sector's growth, though demand has weakened sharply since the COVID pandemic.

"As of the end of September, activity admittedly softened slightly in the third quarter, but it remains stable, which is still a significant feat in this very difficult market," du Halgouet said.

The company remained optimistic about business in the United States, where it recently opened new stores in second-tier locations beyond the big coastal cities. All locations in the country and all product categories drove growth, du Halgouet said.

Asked about recent unrest and violence in France, which led to the looting of one of its stores in the southern city of Marseille, Hermes said it would ramp up security measures. It was too early to call if the unrest would have a significant impact on its business, it said.

Hermes shares are down 36% since the start of the year.

Analysts have flagged a growing sense among investors that Hermes' historically high stock-market valuation, resulting from a decade of strong growth, may move closer to industry averages as the pace of its expansion is slowing.

The brand's Birkin handbags have become more available on the second-hand market and so have lost some of their appeal, several resellers told Reuters, suggesting Hermes' scarcity-driven business model could be coming under pressure.

The Birkin's desirability remains "intact", du Halgouet said, adding the company would stick to its rhythm of increasing overall production volumes by around 6% in the coming years.

($1 = 0.8895 euros)

(Reporting by Tassilo Hummel and Alessandro Parodi; Editing by Emelia Sithole-Matarise and Edwina Gibbs)