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Surprise Ending: Prada, Hermès See Sales Surge in 4th Quarter

The luxury numbers are starting to roll in and they’re rosier than expected, as Prada and Hermès reported strong fourth-quarter sales gains Thursday.

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Patrizio Bertelli

Patrizio Bertelli

Photo By WWD Staff

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MILAN — The luxury numbers are beginning to roll in and they’re rosier than expected.

Both Prada Group and Hermès International reported strong fourth-quarter sales gains on Thursday, although for the entire year of 2002 they went in opposite directions: Prada’s sales dipped while those at Hermès rose only slightly. As is common in Europe, the companies reported sales first and will detail their profit performances in coming weeks.

The improvement of the companies in the fourth quarter came despite a trying time for the entire luxury goods sector. A continued dry spell in global travel (at least of high-spending consumers); weak economies in the U.S. and Europe, and growing uncertainty over the Iraqi situation has cast a pall over the sector.

Luxury industry executives from Bernard Arnault of LVMH Moët Hennessy Louis Vuitton to Domenico De Sole of Gucci Group have repeatedly warned of the chilling effect a war with Iraq would have on their businesses. Indeed, Gucci on Wednesday warned that profitability at its key Yves Saint Laurent unit would be delayed by a year, to late 2004 and 2005 rather than this year as forecast.

Patrizio Bertelli alluded to the uncertainties created by a potential conflict with Iraq as the company reported that its sales grew 10.9 percent to $445.5 million from $401.6 million in the final three months of 2001. He attributed the increase to healthy wholesale and retail sales; investments in product innovation, and penetration in all international markets, even against the backdrop of a difficult economic environment and war worries that slowed down consumer spending and tourism. In the fourth quarter, gross operating margin nearly tripled to $77.1 million from $29.9 million.

"In this continuing weak economic context, the group is determinedly pursuing a vigorous development based on quality and innovation of products and on a strongly integrated industrial and commercial chain," said Bertelli in a statement.

For the year, however, Prada’s sales, excluding those of Fendi, dropped 3.1 percent for the full year to $1.67 billion from $1.73 billion, according to the firm’s preliminary numbers. Bertelli sold his 25.5 percent stake in Fendi to LVMH Moët Hennessy Louis Vuitton in November 2001 for about $260 million.
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Explaining the decrease, Prada in a statement cited unfavorable currency translation and, costing the firm an estimated $64.2 million in 2002 revenue, earlier deliveries, begun in 2001. Prada will report earnings later, but offered an indication of bottom-line results in reporting a 16 percent decline in gross operating margin to $224.9 million from $267.7 million in 2001. Dollar figures are converted from the euro at current exchange rates.

During 2003, Bertelli said he plans to open directly operated stores for Prada, Miu Miu, Helmut Lang, Jil Sander, Church’s and Car Shoe in Tokyo, New York, Beijing, Shanghai, Milan, Paris and Capri, respectively, in addition to a few franchised stores in the Mideast.

"We forecast a further significant development of the group for 2004," concluded Bertelli.

Prada currently has 247 sales points in 65 countries, around 7,000 employees and 19 production and distribution facilities. Last year, Italy accounted for 25 percent of sales, while the rest of Europe generated 24.9 percent and the U.S. 23.8 percent. Japan and the Asia Pacific area accounted for 15.5 percent and 10.8 percent, respectively.

Prada said that it had reduced its debt to $824.6 million versus a year-ago mark of $1.07 billion. As reported, in December 2001, Prada issued a $624.1 million bond, which, together with a capital increase, helped reduce the group’s debt. As reported, Prada last year postponed a possible initial public offering for the third time.

Hermes, meanwhile, reported an 8.3 percent advance in the final quarter at constant exchange rates. Hermès also said sales at airport concessions had showed signs of recovery and business in the U.S., where stores were expanded in November in Boston and Miami, had come back "sharply" in the fourth quarter.

For 2002, Hermes sales managed only a 1.3 percent increase, to $1.32 billion from $1.31 billion, as a result of the weakness of the dollar and the yen. Excluding currency fluctuations, sales for the year moved ahead 5.9 percent.

While ahead 10.3 percent for the year, retail sales were reduced by lower revenue at airport stores, particularly in Asia.

"On the whole, Hermès produced a wonderful result," said Andrew Gowan, equities analyst at Lehman Bros. in London. "It’s a best-in-the-class result in a soft sector and demonstrates the resiliency of the Hermès brand."
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Hermès continued strong in Japan, where sales gained 17 percent despite difficult market conditions. A 4 percent gain in the U.S. reversed a 5 percent decline last year. In the rest of Asia, sales suffered from soft airport sales. Even with an 18 percent retail advance in the rest of Asia, overall sales growth was limited to 3 percent.

Overall sales inched up 1 percent in Europe, but within Hermes’ own retail network in the region the advance was 5 percent. Hermès added three stores in Europe last year: Nuremberg, Germany; Naples, Italy, and Aix-en-Provence, France. Three other stores were expanded and revamped.

By category, leather goods sales increased 16 percent for the year; silk products, a travel retail staple, declined 12 percent, and ready-to-wear, perfumes and watches registered declines between 3 and 5 percent, the company said.

Hermès said it would continue to invest in production facilities over the next year — in particular, by enlarging two of its leather goods factories in France — but had a cautious stance for the year and gave no earnings guidance. "Projections are not easy to make in the prevailing climate of political uncertainty," the company’s statement said.

Hermès earnings are slated to come out March 20.