Hermes: Luxury Retailer Almost Immune to Financial Crisis

Stock price : €96,7 ($137.38)
Conclusion: Waiting for a better entry point

AGM follow up

Notwithstanding a very difficult environment in luxury goods, continuing subdued demand in Japan and in the US, Hermes (HESAF.PK) is seeing some improvement since the end of March. As a result, management is looking for flat sales at constant rates this year, following almost 5% decline in sales in Q1. Forex should provide a further 6-7% boost to sales in 2009. Hermes is showing a superior resilience, notably in its core leather handbag business which represented 43% of sales last year. It seems that the upscale positioning of Hermes makes it “almost” immune to the financial crisis, at least in handbags. This is good news as we estimate that handbags account for more than 60% of Hermes profits. As a result, Hermes could be the only luxury good player posting positive results in 2009.

Longer term, Hermes offers double digit EPS growth prospects, driven by the continuing extension of the retail network (direct operated stores represent less than 60% of the total) coupled with product diversification, notably the watches division which is still very small compared with Richemont or Swatch (SWGNF.PK).

In addition to expensive bags, Hermes trades at a huge premium to the sector. The stock trades 2x over luxury average multiples (32x and 28x 2009 and 2010 P/E) partly due to a superior earnings visibility but also to frequent speculations over changes in the capital structure.

Disclosure: Long Hermes at time of writing.

Comments

[2houndz:]

Core customer is very wealthy, no doubt, but much of the growth has been fueled by the aspirational shopper. Revenue loss at the margin hurts. The number of people I know personally making relatively low income and carrying a $1,000 purse is disturbing to me. I doubt these marginal sales will continue to hold up.

Surely there's a simpler and safer way to make a good return than investing here. Who was it who said "Sell to the masses, live with the classes"? The guy who owns Chiquita - his name escapes me.

I know retail developers who want such high-end stores in their centers because it boosts their images and egos, but even they would not put those operators in their investment portfolios for the same reason. The inherent risk at a time like this doesn't make any sense.

Jun 03 09:34 AM

[theJR:]

HaHa!

Ok, firstly Hermes (like all the other luxury houses) is definitely feeling the burden of a downturn. However, as they primarily sell through their own shops, it becomes almost entirely a PR game to maintain the image of doing well in a downturn.

You can well see this by their announcement to increase the scarcity of the Birkin bag (showing it has well passed it's peak in sales). Around two weeks ago, they announced that the waiting list period would increase from two years to three years.

This manipulation for the benefit of claiming scarcity is a marketing tool that few others in the category are able to access, mainly due to over indulgence in global own brand stores (think LV). If Louis Vuitton were still a luxury brand, they would surely follow suit, alas they are a hollow shell of a brand consumed by one Frenchman's greed...

As for Hermes, this is entirely a perception game which they have proven to be masters of up to this date. How else could US$2.45 billion worth of handbags be perceived as "exclusive."

I have owned Hermes stock now for around eight months, and will sell it in Sept. (before Q3 results are announced). Expect a zero to minus one announcement for Q2, then minus four to five for Q3. Ending with a minus eight in Q4.

I have no knowledge of this, other than being absolutely sure that they are currently purchasing their own bags - at retail prices - from their own shops. Happy trading!

Jun 03 12:47 PM

[Life of Luxury:]

Hermes, like many other luxury companies is feeling the pinch. Even the ultra-rich have been hit hard by this tough economy.

The luxury market will likely be one of the first segments to rebound. The rich & famous have much more resources available for "discretionary spending"

Hermes has been around for many years and has a long lasting reputation for quality:
www.thelifeofluxury.co.../

They will bounce back soon.

Jun 10 05:23 PM

[lamilao:]

that is really a interesting phenomenon.

Jun 15 10:40 AM

[Panta Capital:]

Hermes International: Short trading stock - expect unjustified take over premium to deflate AGAIN: seekingalpha.com/insta...

Jul 06 01:09 PM