Hermès: a timeless classic in turbulent times

Fancy spending $10,000-plus on your dream Birkin bag? You might want to join the queue. Hermès’s strategy — which combines high prices with product scarcity — has enabled it to sail through a tough fourth quarter, where rivals have stumbled.

The French maker of exquisite leather goods managed to increase fourth-quarter sales by 23 per cent before currency effects, beating consensus expectations into a cocked hat. While China’s “zero-Covid” policy dented the end of the year at LVMH, Burberry and Richemont, and drove Gucci’s sales down 14 per cent, there was no sign of disruption at Hermès. Its Asia ex-Japan sales rose a staggering 25 per cent.

This highlights the strengths of the company’s strategy. Its growth is constrained not by how many people want to buy its iconic handbags, but by how many there are in store. Tales of multiyear waiting lists abound, as do those of second-hand sales at a premium to the original price tag.

This supply-constrained growth strategy puts Hermès in an enviable position. Pricing power translates into industry-leading operating margins, which reached 40.5 per cent in 2022, an 8 percentage point increase over the past decade.

It also means that the group can look through all the macro bumps and changing fashion trends that affect rivals to deliver uniquely predictable performance. Indeed, analysis carried out by Luca Solca at Bernstein last year suggests that over the previous decade, it had the lowest deviation from consensus estimates in its peer group.

This helps explain the group’s truly top-end valuation. At 53 times forecast earnings, according to S&P Capital IQ, it is trading at double the multiple of industry juggernaut LVMH.

Hermès’s defensive nature makes its stock a timeless classic and a luxurious hiding place for investors concerned about economic headwinds. But for those who are more sanguine about the coming year — trusting in the resilience of the high-end consumer and hopeful of a Chinese rebound — a lower-rated and more volatile stock might be a better buy.