Why Hermès Remains a Great Investment
● Strong demand for leather goods like the Birkin handbag propelled the French luxury brand ahead of its competitors in the fourth quarter.
PARIS — Nothing says “I love you” better than an Hermès stock certificate — at least according to actor Michael B. Jordan, who gave his girlfriend Lori Harvey some Hermès shares for Valentine’s Day.
That gift just got a little more precious. Shares in the French luxury group closed up 3.1 percent on the Paris Stock Exchange on Friday in response to strong fourthquarter results, as consumers flocked to surefire investments like the brand’s Birkin handbags and Chaîne d’Ancre bracelets.
Revenues rose 12.3 percent in the three months to Dec. 31, sharply outperforming its sector peers as strong growth in Asia Pacific compensated for continued weakness in Europe and a flat performance in the Americas.
Sales totaled 2.1 billion euros in the fourth quarter, representing an increase of 15.6 percent in comparable terms, sharply exceeding a consensus forecast of 8.7 percent growth.
By comparison, sector leader LVMH Moët Hennessy Louis Vuitton reported a 3 percent decline in organic revenues during the same period, while sales at Kering were down 5 percent in like-for-like terms.
Hermès said revenues in 2020 as a whole were down just 6 percent in comparable terms, “an outstanding result” in “the most horrible year for the luxury industry ever,” according to Luca Solca, analyst at Bernstein. “Hermès benefits from top desirability across borders, and long waiting lists on its iconic products,” he said in a research note.
Net profit fell 9 percent in 2020 to 1.38 billion euros, while recurring operating income was down 15 percent to 1.98 billion euros. The recurring operating margin, a key indicator of profitability, improved strongly in the second half of 2020 to reach 31 percent on a full-year basis, beating a consensus forecast of 27.5 percent.
The group plans to pay an exceptional bonus of 1,250 euros to its 16,600 employees in 2021 “for their commitment and contribution to results.”
The better-than-expected performance reflects the tendency of consumers to favor safe-haven brands over lesser-known labels as the coronavirus pandemic disrupts spending patterns.
While super-fans like singer Cardi B steadily expand their handbag collections — she proudly displayed her latest acquisition, a Birkin Cargo, in a video on Instagram this month — it turns out that buying stocks is even more savvy: Hermès shares rose 32 percent in 2020, versus a 23 percent increase for LVMH and a marginal improvement of 1.5 percent for Kering.
And investors remain confident in its prospects: Hermès shares are up 6.2 percent so far this year.
Chief executive officer Axel Dumas said the company was reaping the results of a policy put in place before the pandemic shut stores worldwide and brought travel to a halt: a strong focus on local consumers, a powerful presence in Asia and heavy investments in its e-commerce platform.
“This allowed us to have quite a strong position,” he told analysts and reporters during a webcast.
Online sales posted a triple-digit increase in 2020, with 75 percent of new clients, he said, declining to provide the overall percentage of e-commerce revenues. He said it was difficult to predict consumer behavior going forward.
“It’s too soon to see what real structural changes are happening: we are in the middle of the storm,” Dumas said. “Everyone is dealing with the crisis as they can. The real difference, in my opinion, is how you were prepared going into the crisis.”
He qualified the group’s attitude as “paranoid optimism,” noting that it has had to deal with a succession of major global shocks over the last two decades, ranging from terrorist attacks to climate disasters.
“Our position at Hermès has always been to be very optimistic but to be prepared for crises,” he said. “I think that’s the strength of Hermès, to both plan for the future and on the other hand, to try to be resilient when times are tough.”
Hermès confirmed its guidance for “ambitious” revenue growth at constant exchange rates in the medium-term, although it cautioned the immediate outlook remains uncertain. “For 2021, the impacts of the COVID-19 epidemic are currently difficult to assess, as the scale, duration and geographic extent of the crisis evolve every day,” it said in a statement.
Dumas said the company’s performance so far this year confirmed the trends seen at the end of 2020.
Sales in Asia Pacific jumped 47.4 percent at constant exchange rates in the fourth quarter, fueled by a strong performance in China, Australia and Thailand, while revenues in Japan rose 15.6 percent.
Europe was down 9.7 percent, with France sinking 18.2 percent during the crucial holiday period as the country’s second lockdown kept stores closed during the month of November. Sales in the Americas inched up 0.1 percent.
Revenues in the group’s stores rose 21 percent in the last three months of the year as Hermès maintained a vigorous pace of store openings and renovations, and continued the rollout of its new e-commerce platform in Asia and the Middle East.
In 2021, the company plans to open new boutiques in Detroit, Shenzhen and Tokyo, and to expand existing stores in locations including Milan, Beijing and Paris, where it is due to unveil the renovated flagship on Rue de Sèvres next month. E-commerce will be extended to Thailand and Taiwan.
The brand also plans to keep up a steady pace of launches, expanding its beauty offering, launched in February 2020, introducing a new men’s fragrance, H24, and a men’s watch, H08.
In the fourth quarter, revenues in the leather goods and saddlery division jumped 17.6 percent in comparable terms, and Hermès continued to expand production capacities in France to keep pace with demand for its signature Kelly and Birkin handbags.
Sales of ready-to-wear and accessories were up 12.3 percent, and watches rose by 28.4 percent. Other Hermès sectors, a division that includes jewelry and home wares, posted a 55.8 percent rise.
Silk and textiles were down 1.9 percent, and perfumes lost 9.1 percent, reflecting the continued dearth of tourism, as silk scarves and fragrances are more exposed to variations in travel retail.
The group safeguarded the jobs and salaries of its staff throughout the COVID19 crisis without resorting to government aid, it noted.
“I think we have to remain very humble with regard to the situation,” Dumas said. “We remain confident for the future because we believe the major developments that we are currently seeing confirm the strategic choices and values that have been present at Hermès for some time.”