Luxury-goods stocks have been hit by higher costs for raw materials, lockdowns in China during the pandemic, and the prospect that a global recession could dampen consumer spending.
(ticker: RMS.France), the French maker of Birkin handbags, watches, and silk scarves, has seen its shares fall 3.8% in the past 12 months to a recent 1,516 euros ($1,599), worse than Vuitton bag maker
LVMH Moët Hennessy Louis Vuitton
(MC.France), which is flat, but better than the 19.2% decline of Gucci owner
The dip in Hermès shares might be a buying opportunity because luxury goods are typically resilient during hard times—wealthy consumers tend to cut back less on spending.
Hermès is in a strong position. Sales in the key China market “picked up strongly” in the third quarter, according to the company, and group sales for the third quarter exceeded analysts’ consensus by 9%.
The company also has an army of high-end enthusiasts willing to pay whatever it takes to snap up the latest exclusive limited-edition leather goods, which means that Hermès won’t have problems passing on price increases.
Jean Danjou, an analyst at broker Oddo, has an Outperform rating on the stock. “The undeniable desirability of the brand and of all of its collections, unmatched pricing power, and a more defensive profile in the event of a marked economic slowdown remain the pillars of the investment case,” he wrote recently to clients.
Eric du Halgouet, Hermès executive vice president of finance, has indicated that prices will increase 5% to 10% in 2023, a significant jump from the 4% rise in 2022.
This means the brand is unlikely to see profit margins squeezed.
analyst Matt Garland noted that higher sales growth could increase Hermès margins to 40.3% for 2022, a jump from the 39% consensus tracked by Bloomberg. Oddo’s Danjou has lifted his estimate for 2024 sales growth to 9.9% from 9.3%.
Antoine Riou, an analyst at Société Générale, has a price target of €1,645, a 6.7% climb. Deutsche Bank’s Garland has a €1,320 price target, noting that the majority of gains in the share price into 2023 is likely to be “earnings rather than multiple driven.”
Hermès dates back to Paris in 1837, where it started out as a harness maker and saddler. It has come a long way, growing into a company with a market value of €155 billion that employs more than 18,000. Shares are still pricey: They fetch a high ratio of 44.6 times this year’s expected earnings and is valued at an 70% premium to its peers.
Hermès posted net profit of €1.6 billion for the first half of the year through June, a jump from €1.2 billion in the same period a year ago. Revenue was €5.5 billion, up from €4.2 billion in the first half of 2021.
In an update in October, Axel Dumas, Hermès’ executive chairman, wrote that “we move forward with confidence and caution while continuing to bolster our integrated model, rooted in France and committed to job creation.”
That’s another show of strength: The company is hiring more and making investments, such as its new leather-goods workshops.
A further catalyst for the stock could come from reduced marketing costs in China. Covid lockdowns have meant that expensive promotional events may be delayed or canceled.
If sales growth remains robust despite less marketing, writes Deutsche Bank’s Garland, that’s a cost savings the market has yet to price in. B
Write to Rupert Steiner at email@example.com