Forbes.com
Market Scan
Luxury Profits Won't Last At Hermes
Lionel Laurent, 03.19.09, 10:20 AM ET
LONDON -Shares of French luxury-goods marque Hermes International rallied Thursday afternoon, after a better-than-expected set of annual results and an upbeat appraisal of trading in early 2009 offset worries over the wider economic downturn. But profits will suffer this year, even if the company meets its target of flat sales growth, and investors would do better to look elsewhere in the battered luxury-goods sector.
"With almost no growth and further investment into its distribution network, it's clear that Hermes' margins will come under a little bit of pressure," said Claudia Lenz, an analyst with Bank Vontobel. She told Forbes that annual operating margins would fall by around 80 to 100 basis points in 2009, adding that stocks like Swatch and Richemont were trading at more appealing valuations.
There was enough optimism to keep Hermes shares trading 4.5% higher, at 75.13 euros ($102.52), during afternoon trading in Paris on Thursday. Hermes' repeated forecast of flat sales growth in 2009 may not be inspiring in absolute terms, but it's better than those of rivals Louis Vuitton Moet Hennessey and PPR, given that neither company issued an outlook forecast with their annual results.
So why is Hermes more resilient than some of its peers? Bank Vontobel's Lenz deduced it might have something to do with its brand positioning. "Hermes is known as the very top end of the leather-goods brands," she said, "which seem to have a very loyal clientele that still can afford them."
Hermes said on Wednesday that net profits had risen 0.8% in 2008, to 290.2 million euros ($396.0 million), topping analyst expectations of a figure closer to 288 million euros. The company said its 2007 results were inflated by the disposal of its stake in Leica Camera.
Hermes also said it would not change its investment plans for 2009, which involve opening or refurbishing around 20 stores. This will put pressure on profits, while the expected "stable" rate of sales growth will also not bode well for the company's high fixed-cost base. (See "Hermes Shares Still At Luxury Prices.")
Swiss watch specialist Swatch said earlier this month that it expected a recovery in the trading environment in the second half of 2009, though this was seen as overoptimistic. (See "Swatch's Brave Face.")
Why can't it be $149? 
Can anyone ID the watch in this photo?
