Strong euro weighs on handbag maker Hermes

Luxury goods maker Hermes cautioned on Thursday that a strong euro could hamper its ability to maintain record high profitability achieved in the first half as demand recovered.

Hermes and rivals such as LVMH and Kering have all started to see rising demand in mainland China and improving tourist spending in Europe, but the euro's strengthening this year has raised concerns it could hurt the luxury sector's recovery.

Hermes, known for its Birkin bags and printed silk scarves, said first-half operating income from recurring operations rose 13 per cent to a record high of €931 million, as sales advanced by 9.7 per cent.

Its operating margin hit a record high of 34.3 per cent of sales in the first half, but chief executive Axel Dumas said that performance may not be extrapolated to the full year and that a stronger euro could impact profits next year.

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“We try to be ambitious but are cautious in a very volatile environment,” Dumas told reporters.

He said Hermes was fully hedged against a stronger euro for 2017, but his comments about the currency sent Hermes shares down 2.4 per cent in mid-session trading, dragging down the shares of Kering and LVMH as well.

The euro is up sharply this year, partly reflecting an improving euro zone economy, but this has made products sold in the area more expensive for overseas consumers and tourists.

Hermes shares, which are up around 10 per cent this year, hit a record high in April.

Its first-half operating margin rose from 33.9 per cent last year, reflecting a rebound in the luxury goods industry which had suffered in the past couple of years when demand in China slowed down and a series of deadly attacks in France deterred some tourists from travelling to Europe.

Richemont reported higher sales on Wednesday and Hermes' Dumas said the fundamental business trends within the luxury goods industry remained positive.

Hermes said it was keeping an “ambitious” medium-term goal for revenue growth at constant exchange rates despite growing economic and geopolitical uncertainties.

- Reuters