Will Hermès Stall After a Stellar Year?

PARIS — With record results in 2022, Hermès International remains one of the few luxury brands that has topped the $10 billion mark in revenues.

It remained remarkably untouched by disruption in China as other brands flailed in the fourth quarter and, following strong Chinese New Year spending that pointed to a good start to the year, analysts are waiting for signs of continued pent-up demand and continued luxury spending.

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Will Hermès be able to continue to deliver further expansion or will its explosive growth slow?

With revenues topping the 11 billion euro mark, last year’s results put the company among the leaders of the luxury pack, including Chanel and Louis Vuitton, in outperforming the broader market.

“You have at the moment polarization in the sector, with really high-end, highly desirable brands such as Hermès on top, with Chanel, Louis Vuitton also doing really well, and the other ones who have a bit of a weaker performance,” said Carole Madjo, European luxury goods analyst at Barclays.

The trend will likely continue as luxury shoppers seek out the most esteemed and established names, even as economic headwinds blow a chill of uncertainty through other consumer sectors.

LVMH Moët Hennessy Louis Vuitton, home to Louis Vuitton, Dior and Tiffany, among others, posted a 23 percent jump in sales in 2022, with net profit up 17 percent to 14 billion euros. Privately held Chanel saw revenues of $15.6 billion in 2021, its last reported financials, up nearly 50 percent at constant currency, with an operating profit of $5.4 billion.

Gucci teeters on the cusp of that top tier, with revenues flat at 10.5 billion euros in 2022, but down 14 percent in the fourth quarter. The brand’s performance put a dent in parent company Kering’s fourth quarter results, but the group overall still saw a 15 percent increase in sales to 20 billion euros, while profits rose 14 percent to 3.6 billion euros.

Hermès does not show any sign of slowing going into 2023, as fourth quarter sales were up 23 percent to 3 billion euros, much of it on the strength of sales in China while other brands, notably Gucci, floundered there.

The company’s famously long waiting list provided a deep customer bench which made the brand more resilient during store closures as China emerged from its rolling pandemic lockdown policy, but it faced staff shortages as employees fell ill during successive COVID-19 waves.

The years-long list makes Hermès even more covetable. Chief executive officer Axel Dumas countered the idea that the company is creating scarcity, and noted it is continuing to increase production capacity. Two new leather goods workshops are slated to open this year, as well as a planned enamel factory to increase jewelry output in the next two to three years.

“We’re not trying to limit production. We’re not artificially creating selectivity. We’re trying to produce as many as we can,” he said, noting a 7 percent increase in production against a 16 percent rise in handbag sales in 2022.

That deep waiting list makes not only the brand desirable in a volatile market but the stock too, which marks it as a safe haven for spooked shareholders. However, any anticipated boost from China reopening has already been factored into the stock price, leaving the market underwhelmed despite the stellar results. The stock closed down slightly in trading Tuesday at 1,704 euros.

“The pushback we have from an investor perspective is that on valuation rounds of the stock, Hermès is quite expensive compared to the rest of the sector,” said Madjo. LVMH rings up at 813 euros, while rival Kering is 591 euros.

Despite signs pointing to a potential recession and inflation causing a cost-of-living crisis for many households, luxury spending continues to defy expectations. “The impact was nowhere to be seen, as consumers’ drive to go back to enjoying life was trumping negatives from the stock market,” said Luca Solca, senior research analyst for luxury goods at Bernstein.

Europe is booming, largely due to the return of tourists lured by a weaker currency, with U.S. shoppers taking advantage of the strong dollar.

“I think we’ll see once again a divorce between underlying fundamentals as a predictor of luxury spend and actual luxury spend, given the pent-up demand, the amount of liquidity sloshing around, and the fact that people feel that they have lost out for so long on all the good things of life,” said Solca.

“If the Chinese do embrace [luxury spending] the way we’ve seen with American and European consumers, that could be up in the high double digits,” he added. “We could potentially see the first quarter as the next catalyst for further luxury sector reappreciation.”

Dumas said the company is not counting on Chinese tourists to return to Europe in the same numbers as before, instead staying more local to the Asia region in the near future. Hermès’ “globally local” strategy will serve it well, said Madjo.

“They may have a weak or a lower benefit of tourism spend compared to peers, but Hermès doesn’t need it that much because they are already outperforming the sector so well in the local market,” she said.

Hermès has opened flagships in secondary cities such as Chengdu, Nanjing and Wuhan in China; Austin, Texas; Williamsburg, Brooklyn; and Detroit in the U.S., and Strasbourg in France. Not being dependent on the international tourists in these secondary cities allows Hermès to develop more long-term brand loyalty with local market customers who buy the brand’s home goods and ready-to-wear.

The latter sector was up 35.8 percent for the year, though Dumas chalked up much of that line of business to growth of accessories and footwear. Men’s ready-to-wear designer Véronique Nichanian is the longest-serving designer at any of the major houses, while women’s ready-to-wear designer Nadège Vanhee-Cybulski has been at the helm for more than eight years. In the attention economy, neither is a household name.

“They own desirability. They’re not selling their ready-to-wear because it’s fashionable; they’re selling their ready-to-wear because of its quality and because it’s Hermès,” said Solca.

Other $10 billion brands are going in opposite directions, with Gucci’s superstar designer Alessandro Michele being replaced by the relatively unknown Sabato de Sarno and Louis Vuitton appointing music star Pharrell Williams to head up its men’s division.

De Sarno’s appointment signals that Gucci could be investing in creativity rather than a “prima donna” approach, while Louis Vuitton’s move signals it is looking for outsized social media impact while taking little risk with a relatively small business line for the parent company, which leads with leather goods.

“You don’t recruit a creative director for his or her design technical skills but more for the visibility,” said Solca, comparing Williams to the late Louis Vuitton men’s creative director Virgil Abloh. “What I think was prevailing was the social media footprint of Virgil, even though Virgil had more specific [fashion] training and background in designing and creating clothes.” In other words, Abloh understood the zeitgeist and Vuitton is hoping to continue to capture some of that magic.

Hermès will continue to occupy that sweet spot in the middle by holding its quiet luxury ground. The strategy makes sense for the affluent luxury consumer who is not social media or trend driven. By keeping a steady hand at the helm, “you’re able to attract different audiences and able to refresh your assortment without necessarily betting all of the business,” said Solca.

Hermès also continues to increase its beauty offering, which is a small fraction of its business. At Chanel, the beauty category accounts for roughly a third of the business, and the lower-priced items haven’t put a dent in its positioning as a top luxury brand. Chanel, or Dior, are still thought of primarily as fashion-first brands, while Hermès is accessories and leather goods.

As Hermès seeks out younger middle-class consumers, beauty could become a major entry point for the brand.

“It’s an appropriate move, because this allows you to reach a very broad audience without necessarily trivializing the brand,” said Solca. “Chanel is not suffering from selling a trainload of beauty products every day, and people still think that Chanel is very, very high end.”

“It’s good to diversify into other segments as well, considering the capacity constraints in the handbag section,” added Madjo.

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