Hermes: Luxury Retailer Almost Immune to Financial Crisis

Includes: HESAF, SWGNF
by: Véronique Adam

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 (OTCPK:HESAF) 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 (OTCPK:SWGNF).

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.

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