Hermès Q4 Sales Surge by 18%, CEO Confirms Price Increase

Axel Dumas shrugged off concerns about the Chinese and US markets, despite a recent 8 to 9% price hike last month.

Hermès increased prices by 8% to 9% in January to counter rising inflation, which led to a 6% increase in production costs and negative currency fluctuations. The Hermès company confirmed on Friday. However, CEO Axel Dumas believes this won’t affect the company’s outstanding sales trajectory. “This is our strategy, and I believe our customers understand that strategy, perhaps even more so than financial analysts,” Dumas said in a call with analysts and reporters after announcing the fourth-quarter and full-year results.

A Hermès store in China. Source: HERMÈS/JONATHAN LEIJONHU The French brand is demonstrating resilience as luxury spending slows down, with sales increasing by 18%, or €3.36 billion (at fixed exchange rates), in the three months ending December 31.

Annual revenue reached €13.42 billion, a 21% increase at constant exchange rates, despite a 7% price hike in 2023.

Bernstein analyst Luca Solca noted that the renowned French luxury brand, known for its Birkin and Kelly bags, continues to leverage its “strong brand momentum.” These figures surpass the agreed-upon sales growth forecast of 13.7% in Q4.

“The key is leather goods leading the way and hitting double digits in the quarter, despite the usual year-end lull due to well-targeted store management hitting targets well in advance. However, Hermès is just one of the companies that has confirmed signs of consumer recovery in the US, as confidence in recovery and lower inflation is expected,” he said in a note after the initial release.

Hermès Spring 2023. Source: Gorunway This momentum has propelled Hermès to lead in the luxury segment. Sales at rival LVMH Moët Hennessy Louis Vuitton increased by a cautious 5.5% in Q4, while Kering lagged behind with a 6% decline in the same period.

The brand has proven itself capable of pleasing investors, helping its stock rise by nearly 5% in midday trading. “For other luxury companies, this hasn’t been a positive year. So, there seems to be a polarization in our industry, those who are very successful and those who are less successful,” Dumas said without specifying any competing companies.

Hermès’ numbers affirm that brand value is increasing not only in the handbag category. The growth of ready-to-wear clothing and watches has outpaced the core leather goods category in recent quarters. This trend continued during the holiday season, with ready-to-wear clothing up 27.5%, while leather goods sales increased by 10.4%. Beauty cosmetics, an accessible and expanding category for the company, as well as the company’s watch division, both saw a 22% growth in Q4.

Dumas emphasized the importance of the cosmetics category, both in current achievements and future potential. He said they are leveraging this segment with plans to expand into skincare. He did not provide a specific timeline for new products but noted that the overall beauty portfolio will evolve into a “comprehensive and three-dimensional brand,” with skincare products increasingly joining color cosmetics and expanding fragrance offerings in the beauty segment.

This is where Hermès can access more and ambitious customers. The brand’s perfumes and makeup have infiltrated the lives of these buyers because this category of goods is available at more retail outlets than the company’s traditional distribution channels, such as Sephora in some areas and duty-free shops at airports. Travel retail has boosted wholesale activities by 24% in 2023. Dumas joked that the company has “too many customers” and doesn’t see that trend slowing down. This will increase the square footage of store space under the management of real estate director Florian Gamrat.

Hermès will expand its retail footprint. The company opened a new store in Wuxi, China, on January 5 and has a new store in Princeton, N.J., slated for April. They are also expanding into other cities, including Lille, France, and Shenzhen, China, while also planning to renovate their stores in Singapore.

The company’s strong cash position and vertically integrated product development model will enable it to secure prime real estate locations, and Dumas said Hermès is looking for more top locations outside traditional shopping hotspots.

He emphasized they would not engage in real estate battles on Fifth Avenue currently with brands like Prada and Gucci – brands that exist in buildings in New York City and Hermès has no plans to compete with LVMH to secure positions on the Champs-Élysées in Paris.

Hermès also plans to open a third store in India, although Dumas did not disclose the specific location.

While India’s wealthy continue to shop abroad in destinations like Abu Dhabi and Dubai, the brand hopes to nurture the young middle class, a country’s ambitious.

At the Middle East, Hermès has majority stakes in its distribution partner companies after various changes in ownership laws in the region, in line with the company’s overall vertically integrated development strategy. Dumas said this change is “very easy and flexible” as the company has been heavily involved in directing and strategizing in these countries. “We see great dynamics in the Middle East. Dubai is vigorously working to achieve a turning point in the region with this strong momentum,” he said.

While others see many issues in China, Dumas maintains his optimism. The CEO lowered any economic turmoil risks domestically, with the real estate market in chaos and the country experiencing deflation since last summer, saying that while Hermès has seen slightly fewer visitors in recent months, they will not discount to attract customers. “We are not inflationists,” he said, emphasizing that any recession in China is contained and offset by strong growth in other Asian countries, including South Korea, Indonesia, and Thailand.

The company invested €250 million in improving distribution systems in Asia, focusing on Beijing and Chengdu in China. Sales in Asia increased by 14.8% in Q4, with Japan showing strong growth of 26.2%.

Dumas also dismissed any concerns about the upcoming US presidential election and economic uncertainty. He said any fluctuations from luxury consumers usually exist in the short term. “Currently, we haven’t seen any changes in trends. It is predicted to be slightly lower until the election, and regardless of who is elected, it will increase afterward,” he said. “We can always offset any losses that occur in November and December with events and end-of-year holidays.”

The brand’s Q4 performance in the most recent holiday season, against the backdrop of economic instability in other sectors, has shown that. Particularly strong growth in the Americas during the three-month period ending December 31, with sales up 21.6%.

In Europe, where Hermès saw 21% growth in Q4, the brand is less dependent on the return of Chinese tourists than other brands. “The impact of tourist arrivals is not significant for us compared to other brands in the same industry,” he said, pointing out the mixed line of local loyal customers and high-income individuals traveling to Hermès. Dumas noted, “On average, luxury tourists may spend more than local customers.

Spending on communications in 2023 was €860 million, with €600 million allocated in the second half of the year for brand and customer events. CFO Éric du Halgouët emphasized the company’s focus on communication budgets for customer-only events.

Hermès Summer 2023. Source: Hype Beast The company is addressing recruitment issues in the luxury sector with another bonus for employees and will pay €4,000 to all employees worldwide as a reward for outstanding performance.

Hermès has over 22,000 employees worldwide and continues to recruit to meet its sales growth targets. The company hired about 2,400 new employees last year and expects that number to stabilize in 2024. They will open another leather goods production workshop in France later this year, adding about one workshop per year over the next three years. Each new workshop will increase production capacity by about 6%.

Looking ahead, the company sees itself as stable despite political obstacles and slower economic growth in other categories as consumers become more cautious in their spending.

Dumas said, “The group begins the new year with confidence in its unique company model and in the particularly prominent values it embodies, such as independence, savvy, and creativity.”