Hermes: Expensive but Worth It

Stock Price : €103 ($146 USD)
Conclusion: Expensive but worth it.

Q2 sales up 12.2% (7.6% H1) reported, 3.9% (0.4% H1) organic. Management expects flat sales like for like for the year and a slight decline in operating profit.

Q2 sales release confirmed the improvement seen since the end of March, which indicates that Hermes is outperforming peers thanks to its upscale positioning. Leather bags sales increased by 21% in Q2, which is not sustainable, we’re looking for 10% increase for the year. The positive growth in silk (4.3%° and ready to wear (5.4%) is good news in Q2, while watches, tableware and perfumes continue to decline.
Asia Pacific excluding Japan is driving sales (+26% Q2 +22% H1) while France is recovering with sales up 5% in Q2 (0.5% in H1) compensating for continuing decline in the Rest of Europe.

We expect Hermes to continue to outperform peers in the next few months.

• First, Hermes' client base seems to be relatively resilient in the current economic downturn.
• Second, Hermes values, based on durable luxury craftmanship rather than on fashion, seem to be more adapted to the current economic environment.
• Thirdly, the owned store network is doing well and more than offsets a depressed wholesale business.
• Last, hard luxury items, notably watches and jewellery, which are the most affected by the crisis, account for a minor part of Hermes sales.

As a result, we feel that management guidance is conservative and we believe that Hermes should be in position to achieve a slight increase in profit this year.

The stock trades at more than 2x the average multiple of the luxury sector, which is clearly not the best entry point. However, we think that Hermes offers a unique visibility in the luxury goods sector.

Disclosure: No position