Hermes International Chief Executive Officer Axel Dumas forecast a difficult year with subdued growth as terrorism saps tourist spending, the source of a third of the luxury industry’s sales.
“We haven’t had the same level of tourism in France this year as before,” Dumas told reporters in Paris as the company reported 2015 earnings that rose 19 percent. He said 2016 will be “complicated” by headwinds the industry faces across the globe, yet struck a resilient tone: “We don’t have to panic. A challenge never hurt anyone.”
Tuesday’s bombings in Brussels worsened the outlook for the luxury market, a third of which comes from purchases by tourists, according to consultants Bain & Co. Tourist spending had already declined 5 percent in Europe, dragged down by a 16 percent drop in France following the November attacks in Paris, according to Global Blue, which handles payment processing for tax-free shopping.
“Many foreign tourists see Europe as one place, they don’t differentiate between Paris and Brussels,” said Zuzanna Pusz, an analyst at Berenberg. “If there are bombings in Europe, it equals ‘don’t go there’ for tourists. The Brussels attacks will add on top of the negative sentiment.”
Hermes said sales in France rose 6 percent, faring “remarkably well” despite the slowdown after the Paris tragedy. It aims to offset a drop in tourist spending there by tapping demand in other cities such as London and Milan, Dumas said. The stock rose 2.5 percent to 319.10 euros as of 10:49 a.m. in Paris.
Operating profit rose 19 percent to 1.54 billion euros ($1.7 billion) on an adjusted basis. Analysts predicted 1.52 billion euros. The margin widened to 31.8 percent, after the company had warned profitability would be close to 2014’s 31.5 percent because of adverse currency shifts.
The beat “shows resilience in a slower-growth environment,” MainFirst analyst John Guy said in a note.
Hermes is confident for the longer-term future, Dumas said. The maker of 4,200-euro saddles is targeting revenue of 6 billion euros by 2020, up from 4.84 billion last year.
Luxury companies also face slowing demand in China, a slump in Hong Kong and Macau, and subdued consumption in the U.S. A Chinese government campaign against bribery and extravagance has stunted that market, and Patek Philippe Chairman Thierry Stern said last week it may take years for Chinese demand for luxury watches to rebound.
Hermes is benefiting from two new productions sites in France, which are boosting its supply of handbags and other leather goods. Earnings were also buoyed by sales in Japan, which has seen an influx of Chinese tourists. Still, the company kept its guidance for 2016, saying growth could be below its medium-term goal of 8 percent growth at constant exchange rates due to global economic and political risks.
The company plans to raise prices about 3.5 percent this year in Europe, in line with production costs, Dumas said. He said it’s too early to give a margin forecast or comment on sales growth.
This article was written by Corinne Gretler, Thomas Mulier and Andrew Roberts from Bloomberg and was legally licensed through the NewsCred publisher network.