Birkinomics

Hermès.

Founded by Thierry Hermès in 1837, initially as a harness workshop that catered to European nobility. Over the past two centuries, Hermes has evolved from equestrian goods to a globally recognized luxury brand. The brand now operates across several luxury segments including leather goods, ready-to-wear, accessories, home goods, fragrances, and silk textiles. Hermès has become synonymous with timeless elegance and artisanal craftsmanship known for its iconic products like the Birkin and Kelly Bags.

High barriers to entry, brand prestige, and wealthy consumer bases mark the luxury sector. The company’s mission is to preserve its artisanal heritage, uncompromising quality, and foster innovation with a sustainable framework. The brand's tagline is “Crafting the inimitable,” reflecting its commitment to creating unique, durable, and desirable products. Hermès has consistently been able to grow through its industry-leading operations margins, financial strength, and asset-light business model. 

Hermès has become one of the largest names in the luxury sector through its heritage and reputation. With its customer loyalty and pricing power through its iconic products like the Berkin Bag which boats a long waitlist, underpinning the company’s exclusivity and demand for its products. With a highly integrated artisanal supply chain, Hermès combines ethical business practices with unmatched craftsmanship. Hermès has recently invested heavily in expanding its retail footprints in emerging margins to capture the rising tide of affluent demographics. Hermès’ artisanal workshops, vertical integration, and focus on quality have given them a robust and defensible competitive moat in the luxury space. 

The bad boys over at Azar Capital Group believe Hermès is worth analyzing for several reasons including its industry leadership, economic trends, investment potential, and strategic evolution. Despite economic uncertainties, Hermès has been consistent with its growth, highlighting the luxury industry's resilience and customer base inelasticity. Hermès represents a compelling opportunity for investors seeking exposure in the luxury goods sector, supported by their business practices and growth prospects. Recent developments in the company expansion through physical retail, digital transformation, and product diversification underscore Hermès’ agility in maintaining its market relevance. 

Hermes is a juggernaut within the luxury goods industry, they have been outperforming most of its peers with revenues surpassing $12 billion in the first nine months of 2024. This reflects a 14% growth compared to the previous year's revenue in the same period. In its most recent quarter, it reported a revenue of $4 billion, marking an 11% increase in YoY revenue despite global economic uncertainties. In the first half of 2024, Hermès reported a net income of $2.6 billion, representing a 32% net margin this shows Hermès’ ability to translate revenue into bottom-line growth. Hermès profitability metrics are industry leading with its gross margins exceeding 60% which is unrivaled in the sector. Hermès is projected to post over $16 billion in revenue in 2024, with annual EPS growth of 12% over the next 3-5 years 

Hermès trades well above its peers with a PE ratio of 50 and an EV/EBITA of 35x compared to its peers that trade in the 20-25x range. The brand's valuations are justified due to its superior margins, unmatched brand equity, and consistent growth. Hermès has a price-to-book ratio of 20x due to the value of its intangible assets like its artisanal craftsmanship and its brand heritage, this dwarfs its peers like LVMH and Kering. This makes Hermès look like the Bentley of luxury stocks, expensive, exclusive, and undeniably worth it. 

Hermès was able to produce an impressive $3 billion in operation cash flow and almost $2 billion in free cash flow in the first half of 2024. With a cash position of over $10 billion, Hermès has a very strong balance sheet free from debt, further solidifying its financial resilience compared to its competitors. In the first nine months of 2024, Hermès repurchased $43 million worth of shares, this signals strong confidence in its growth trajectory and commitment to enhancing shareholder value. The company's sustained double-digit growth is fueled by rising demand for luxury goods, global expansion, and digital advancements helping to solidify its status as a long-term winner. 

Hermès operates in the ultra-luxury segment, competing with firms like LVMH, Richemont, and Kering. What sets Hermès apart from its competitors is its focus on quality, scarcity-driven demand, and a legacy that goes back over two decades. Many of its competitors have begun to make their products more accessible, and Hermès stays exclusive with some of its products having several-year waitlists.  With its vertically integrated business model, Hermès can retain complete control over its supply chain, ensuring quality and protecting its brand against dilution. 

Hermès portfolio spans several luxury segments but two products dominate its financial performance, its leather goods account for 50% of revenue, and ready-to-wear accounts for 24-30% of the company's revenue. Hermès leather goods segment is anchored by its iconic Birkin and Kelly bags, which are both luxury symbols and investment pieces, known for their scarcity and exceptional quality with multi-year waitlists. The company's ready-to-wear collections showcase innovative design that blends tradition and modernity, reinforcing Hermès’ position as a trendsetter while maintaining exclusivity. 

The success of Hermès stems from the team of exceptional leaders, robust network of artisans, and store employees who uphold its legacy many of which stay with the company for decades. Axel Dumas is a sixth-generation family member, currently the executive chairman of the company since 2013 he has architected the company's long-term growth strategy. Pierre-Alexis Dumas is the company's Artistic Executive VP, responsible for maintaining Hermès’ iconic design philosophy ensuring the brand's creations remain aligned with its heritage. Guillaume de Seynes is Hermès’ EVP and leads the company's manufacturing and investments, overseeing its production and investments also ensuring the brand retains its artisanal craftsmanship.  

Hermès operates in a highly competitive luxury market, with its main competitors being LVMH, Kering, and Richemont. LVMH is the largest luxury retailer known for its diverse brands currently holding the largest percent of the market share. Hermès holds a small market share due to its premium product mix, exclusivity, and product scarcity. Some of the key differentiators that make Hermès unique are its timeless scarcity, vertical integration, and artisanal excellence with some of the company's products being handmade and requiring more than 48 hours of meticulous work. 

Since its founding Hermès has been able to create a strong moat built from its strong brand equity, scarcity-driven demand, vertical integration, craftsmanship, and resilience to trends, Hermès’ focus on its timeless designs shields it from the volatility of fashion trends, providing them with consistent demand. The company employs highly skilled workers, many of which are trained through Hermès in-house programs ensuring its products remain unparalleled. Hermès has controlled the supply of its products to create legendary waitlists, reinforcing its desirability and customer loyalty.

Hermès organic growth has been driven by its strategic initiatives, product innovation, and ability to maintain customer loyalty. The company's main revenue drivers are its leather goods, ready-to-wear collections, and perfume and beauty products. Hermès recently launched Barènia perfume which is inspired by the company's heritage leather goods and the Le Regard beauty line, expanding the brand's footprint in a high-growth category. Hermès focuses heavily on innovation to ensure its products remain fresh and desirable, from expanding its artisanal workshops to launching products.

Hermès has historically relied on organic growth as well as selective acquisitions and partnerships that have fortified its vertical integration and supply chain over the years. Hermès no has no history of acquiring other brands, however, they have acquired small textile firms to ensure a steady supply of high-quality raw materials that are critical for the company. Hermès has also invested heavily in tanneries and leather processing facilities over the years to ensure Hermès’ dominance in leather goods by securing exclusive access to premium materials. Hermès has also built strong strategic partnerships with local artisans in emerging markets to enhance its regional reliance while maintaining its global standards.

Hermès has several tailwinds that position them for accelerated growth in the near and long term including supply chain optimizations, technology advancements, and sustainable leadership. Hermès recently invested in expanding its workshops with a new location in France to modernize production ensuring it can meet demand while preserving artisanal quality. They have also developed digital-first experiences in emerging markets like Latin America and Southeast Asia where they are expected to grow significantly. 

Hermès operates in a large market with a total addressable market for luxury goods of over $350 billion and is projected to grow at an 8% CAGR till 2030. Hermès has invested heavily in untapped regions like India, Southeast Asia, the Middle East, and Latin America with its e-commerce strategy to capitalize on growing wealth in underpenetrated markets. Since the pandemic, there has been a shift in consumer preferences showing a preference for durable, high-value luxury goods over fast disposable fashion. There has also been an increased demand for gender-neutral products which has provided Hermès opportunities to expand its men's lines and accessories. Hermès has also expanded its artisanal production capacity through new workshops and apprenticeship programs, its Riom leather goods workshop has a capacity of 250 artisans which has enabled them to meet growing and continued demand. 

Hermès stands at the forefront of the luxury industry, although its path to dominance does not come without risks. Hermès relies on rare and premium raw materials, and any disruption to the company's specialized supply chain could hurt its production capabilities and margins. Also training artisans takes years which could potentially create labor supply constraints, it the company’s training process can't keep up with growth, production delays, and bottlenecks may arise. As a global luxury brand, Hermès also faces risks from shipping delays, transportation costs, and regional distribution challenges, especially in emerging markets. 

Hermès also faces significant market risks from its competition and external dynamics. The Company rivals like LVHM and Kering are rapidly innovating, expanding, and investing heavily in their digital luxury experiences, failure to outpace these players could hurt the company's market share. Hermès’ growth relies heavily on emerging markets, any economic downturns, geopolitical instability, or shifts in consumer sentiment could hurt demand. Also, a significant portion of the company sales are tied to luxury tourism. Especially in Europe and Japan, any travel restrictions could significantly hurt sales in its key regions. 

Hermès also faces legal risks that include IP battles, digital asset challenges, sustainability litigation, labor disputes, and supplier conflicts. Counterfeiting remains a threat to Hermès as the widespread availability of fake products risks diluting the company's exclusivity. The company recently faced a lawsuit over MetaBirkins which unscored the growing complexity of protecting its IP in the digital and metaverse spaces. Hermès could also face disputes related to working conditions, wages, or local labor laws, especially in emerging markets. There are also potential disputes with suppliers over pricing, quality, or excusing would could hurt its tightly integrated supply chain.

Hermès stock trades at a premium making it highly sensitive to shifts in expectations, any minor underperformance or reduction in revenue guidance could trigger sharp declines in stock price. Hermès’ valuation hinges on its ability to sustain its double digital revenue growth any major disruptions from its operation could erode investor confidence. Hermès shares are tightly held by the family and long-term institutional investors, this limits liquidity and could amplify stock price volatility during periods of market stress. While Hermès caters to the affluent and has a resilient customer base any future pandemics, wars, or financial downturns could disrupt discretionary spending and travel-dependent sales challenges. 

Hermès is unmatched as a global symbol of luxury, craftsmanship, and timeless elegance with nearly two centuries of heritage. The company has been able to create an unassailable competitive moat defined by its artisanal quality, product exclusivity, and vertically integrated supply chain. Hermès boats a strong balance sheet with 32% net margins, over $12 billion in revenue, and more than $10 billion in cash reserves. Its dominance is driven by leather goods like the Birkin and Kelly begs alongside its innovative line of ready-to-wear collections.

The bad boys over at Azar Capital Group will be giving Hermès a ‘BUY’ rating due to the company's ability to consistently grow with exceptional profitability and high customer loyalty. The company’s expansion into emerging marlins along with its investments in artisanal capacity and digital innovation provides a clear path for continued revenue and margin growth. Hermès has an unparalleled brand power coupled with its scarcity-driven demand that ensures the company retains its dominance, while it faces intensifying competition. Hermès is not just a company, it's a global institution, synonymous with timeless luxury and financial excellence. 

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.