Hermes: Resilient, but Decelerating Sales on a Tough Comparison Base in Asia; Shares Expensive

We maintain our fair value estimate of EUR 1,270 for wide-moat Hermes RMS as the company reported strong third-quarter sales at 15.6% at constant currencies. This was still quite a meaningful deceleration from 25.2% growth at constant currencies in the first half. The Americas’ performance continued to be remarkably strong with growth of 20.4%, broadly in line with first-half trends. Hermes is outperforming the vast majority of its luxury peers, which have suffered declines in this market in first-half 2023. We believe Hermes to be more resiliently positioned with less exposure to aspirational clients who are more economically sensitive. Sales in Europe also decelerated only slightly to 18% growth in the third quarter (22% in the first half). Asia, excluding Japan, was the weakest market with 10% constant-currency growth. This came in addition to a challenging comparison base (33.7% growth in this market in third-quarter 2022). Sequential deceleration was broad-based across product segments, with the ready-to-wear and watch segments showing the strongest performance in the quarter.

Hermes is benefiting from the stronger-than-usual effect of price increases this year at around 7%, as well as the positive effect of productivity in manufacturing, which comes from a comparison base (many employees were sick with COVID-19 in 2022) of around 1%, in addition to the usual 6%-7% volume increase projections. Taking this into account, along with exposure to more affluent, less economically sensitive consumers, we expect Hermes to deliver one of the strongest performances among luxury peers in 2023. Shares still look expensive, trading in 2-star territory.