By Dominique Patton
PARIS, July 29 (Reuters) - Hermes shares slid more than 10% on Wednesday after the Birkin bag maker posted second-quarter sales growth in line with expectations but said it had yet to see a fundamental rebound in China, its biggest market.
Shares in the French luxury group were down 10.5% to €1,517 at 1039 GMT, on track for their worst day in more than 15 years.
Hermes said second-quarter sales of products including handbags, silk scarves and perfume rose by 6.7% in currency-adjusted
terms to €4.1 billion ($4.67 billion), in line with expectations and slightly up from 6% growth in the first quarter.
While an operating profit margin of 41% was better than expected, the relatively modest sales improvement was likely to grab investors' attention, analysts said.
"The problem here is that the shares are trading at 38 times earnings, by far the highest multiple in the sector. And the earnings essentially didn't budge," said Jelena Sokolova, analyst at Morningstar.
The report came after similarly muted results from industry bellwether LVMH on Monday. Gucci owner Kering, on the other hand, positively surprised the market by posting better-than-expected results at its biggest brand Gucci, a sign CEO Luca de Meo's turnaround push is starting to work.
"We think investors will focus this morning on the top-line growth, and Hermes' slower pace of reacceleration vs peers," analysts at JPMorgan said in a note to clients.
MIDDLE EAST CRISIS DENTS BUYING
Hermes, which carefully controls production and sales to maintain exclusivity, weathered the COVID-19 crisis better than peers, and had been the most resilient luxury group in a years-long industry-wide slowdown.
Nonetheless, growth fell below high single-digit percentages in the first quarter after conflict in the Middle East dented shoppers' appetite from Dubai to Paris, weighing on shares, which are down 20% so far this year.
The impact of the conflict weakened in the second quarter, the group said on Wednesday, while growth in France increased by 6% from a drop in the first three months of the year.
"In the second quarter, we are seeing improved momentum in our Paris stores," CEO Axel Dumas told reporters, adding that tourist traffic in the country had improved.
But Dumas said there were still question marks over both France and the Middle East in the second half, while there was no sign of any rebound in China.
In Asia-Pacific excluding Japan, Hermes' biggest region by sales, revenue grew at 2.5% in currency-adjusted terms, steady from the first quarter, but below the 3.3% expected in a consensus of analysts provided by Visible Alpha.
"I see the Chinese market stabilizing, but I do not yet see a fundamental rebound," Dumas said, adding that despite the "uncertain" situation, he was nevertheless happy with the result.
LEATHER GOODS SEE GROWTH OF 10%
Hermes, which caters to the ultra-wealthy with handbags costing more than $10,000, said the leather goods division that accounts for almost half its revenue grew 10% in the quarter, slightly below a consensus of 10.8%.
Dumas said the pace of growth should continue at around the same rate in future months.
"I see ... going forward the same tendency which at plus 7% is good," Dumas told analysts.
However investors are looking for more recovery, said Sokolova.
"The rest of the sector is kind of re-rating because markets are expecting recovery, and we do have early signs of the recovery happening here and there. But with Hermes, it's just kind of business as usual," she added.
($1 = 0.8773 euros)
(Reporting by Dominique Patton; Writing by Lisa Jucca; Editing by Jan Harvey and Louise Heavens)
