Hermes slumps as bottlenecks hinder sales of Birkin bags

Bloomberg

Hermes International shares fell the most in five years after the French luxury-goods maker reported lower revenue from its key leather-goods division as it failed to keep up with demand for products like $9,000 Birkin bags.
The stock dropped as much as 8.4%, having lost more than a quarter of its value since setting a record late last year. Hermes said that sales of leather goods and saddlery fell 5.4% at constant exchange rates in
the fourth quarter, more than double the decline analysts
expected.
Items such as Kelly bags are becoming even harder than normal to find in shops. That product category is the source of almost half the company’s revenue. Hermes said it will boost production capacity
with new sites in the French towns of Louviers, Sormonne and Riom through 2024, plus
it opened a leather-working school in September.
“We are facing high demand, and we have a product that’s very hand-crafted,” Executive Chairman Axel Dumas told reporters in a call. A Hermes bag generally takes a leather worker 15 hours to make. “Unfortunately sometimes, there’s a waiting list.”
Total revenue rose 11% at constant exchange rates in the fourth quarter, just ahead of
estimates.
Gucci owner Kering SA and LVMH SE previously reported results that beat analysts’ expectations. Luxury demand has experienced a V-shaped recovery from the pandemic as consumers spend the savings accumulated during the worst of the lockdowns on pricey rings, shoes and wallets as economies and stores reopen. Hermes isn’t fully benefiting from the upturn because its production capacity is too tight.
“This is a bit of a contrast with the significant sales and earnings beats from all its luxury peers in recent weeks,” wrote Stifel analyst Rogerio Fujimori.
Annual recurring operating income advanced to $4 billion, up from 1.98 billion euros a year earlier. Analysts expected 3.41 billion euros. The recurring operating margin reached a record 39%. Hermes has more than 4,300 leather workers on its staff and about 20 production sites for the division. The company said in December it aims to boost production volume of leather goods by 6% to 7% a year. Analysts said that’s a deceleration from 7% to 8% previously.
Hermes increased product prices last month by 3.5% on average worldwide. That compares with an increase of 1.5% a year ago. Dumas said the luxury company is sticking to a policy of price increases linked to input and labour costs, and it generally hikes prices once a year.