Hermes Earnings: Strong Growth Across Regions Ahead of Most Peers; Shares Still Expensive

We increase our fair value estimate for wide-moat Hermes RMS by 28% to EUR 1,270 per share as the company reported strong revenue growth and profitability improvement in the first half of 2023. Although we increase our assumptions for full-year profitability slightly, the bulk of our fair value increase comes from our reduced assumptions for the firm’s cost of capital. We now assume a 7.5% cost of equity based on below-average systematic risk, 1.5 percentage points below the rate of return investors expect of a diversified equity portfolio. We believe this better reflects Hermes’ low sensitivity to economic cycles, low operating leverage, and low financial leverage. Our fair value implies a multiple of 35 times 2023 estimated earnings, still well below the market multiple of 50 times earnings.

For the second quarter, Hermes reported constant-currency revenue growth of 27.5%, ahead of most luxury peers except for Moncler. Pricing should contribute around 7% to growth for the group this year. Further, the leather goods division benefited from a relatively easier comparison base on the production side in 2022, as manufacturing capacities were still affected by COVID-19 in January and February. That helped deliver growth of 20.8% for the segment in the first half. Ready-to-wear and other Hermes sectors, which comprise jewelry and home furnishings led growth, as usual. Geographically, Hermes continues to be immune to weakening demand experienced by its peers in the U.S. market: sales in the Americas were up 20.5% in the quarter in contrast to declines for most competitors. Sales in Europe grew by 21.3% and sales in Asia improved by 32.3%, helped by the reopening in China and largely in line with peer trends.

Strong sales growth was accompanied by margin expansion to a record 44%, 190 basis points up from the prior-year level. Management expects the margin in the second half of the year to be hit by an acceleration in investments in communication and employees.