Hermès Can Only Show Its Worth in a Luxury Downturn – The Wall Street Journal

Hermès International , RMS 0.49% maker of the world’s most exclusive handbags, is also Europe’s most exclusive consumer stock. Only the next downturn will show whether it is worth the money.

The luxury boom continues for now. Gucci-owner Kering said last week that first-quarter sales increased by 18% compared to the same period of 2018. LVMH Moët Hennessy Louis Vuitton also had a strong start to the year, with sales growth of 11%. The two companies’ owners are feeling so flush they donated €300 million ($337 million) between them to the reconstruction of Notre Dame, including €100 million from LVMH itself.

Double-digit sales growth from peers makes it harder to justify Hermès’s plush valuation. Shares in the maker of $10,000 Birkin handbags fetch 41 times projected earnings, more than any other big European consumer stock. They have always been more expensive than other listed luxury brands, but the premium has widened to roughly 80% in the recent luxury boom.

Hermès’s annual shareholder returns have averaged 20% since 2014, comfortably beating the S&P 500 and French CAC 40 indexes but lagging the returns from less highly valued names such as Adidas and Italian liquor company Davide Campari-Milano . Kering and LVMH have returned 32% and 24% respectively.

Investors are willing to stump up for Hermès, despite slower growth, because the company is considered a safe place to park money in a cyclical industry. Its shares bounced back quickly from the 2008 financial crisis and a Chinese slowdown five years later. The brand’s annual sales growth has dipped below 8% just once since 2010. Competitors have had a spikier time of it.

A woman working in the Hermes workshop in Hericourt, eastern France. Photo: sebastien bozon/Agence France-Presse/Getty Images

The next luxury slump will test Hermès’s resilience again. Few expect the moment to come in 2019, but maintaining steady growth will be tougher for the company to achieve when the downturn does arrive. At nearly $7 billion, its annual revenues are three times what they were in 2009. The 10% clip that investors have grown accustomed to is harder to hit at that kind of scale.

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Hermès also generates more money today from ready-to-wear, silk scarves and other categories that can be volatile. The company cannot starve the market of these items in the same way it does its famous Kelly and Birkin handbags to keep a well of growth in reserve.

The establishment of reputable online second-hand handbag sellers like The RealReal is also double-edged. It is reassuring that Hermès is the only luxury brand whose bags cost more to buy second hand than new—the Birkin is 43% more expensive in the resale market than in a Hermès store, according to Berenberg research. But easier access to the bags, whatever the premium, undercuts their scarcity value.

Hermès’s reputation as a haven will be harder to defend in the next downturn than it was in the last ones.

Write to Carol Ryan at [email protected]

Source: wsj.com