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HERMÈS INTL. - BUY | EUR1450 vs. EUR1370 Even more confident after an impressive H1 Production capacity in leather goods to regularly increase in coming years Ni signs of slowdown at this stage Target price from EUR1370 to EUR1450
Hermes International SCA Hermes International SCA
Hermès reported an outstanding set of half-year results, with both the top-line and profitability beating consensus and our expectations. All regions experienced double-digit-growth including Asia in Q2 22 despite the strict COVID-related restrictions in China. The operating margin reached 42%, another record. Hermès confirmed its strong resilience in China and said that in an unpredictable economic environment it would be impacted after other peers.
2Q 22 expected up 15% organically. EBIT margin contraction due to investments and FX Hermes will release its 1H22 results on 29 July, before market open. We expect a solid 2Q with organic sales at +15%, Leather Goods at +7% and strong growth in other categories. At the EBIT level, we expect Hermes to post EUR2bn in 1H 22, with 37.3% EBIT margin. This is c. 330bps contraction vs. 1H 21, due to FX, higher opex (e.g. hirings) and investments. Resilient in a downturn, but not as much as you''d expect Hermes is often credited as being the quintessential luxury brand and the only ''real'' luxury company, hence perceived as resilient. We do believe this is true and that in a downturn it would be the most resilient in our coverage, but we would not expect it to be immune. Looking at past recessions and notably 2008-09, Hermes did not experience negative sales growth in its Leather Goods division (c. 45% of sales), but it did in other categories. It should be remembered that the company also sells many entry-products such as silks, perfumes, bracelets, etc, which we do not expect to be as resilient as its Leather Goods offer in a downturn. Increasing 2022e-24e EPS by c. 4%. TP cut to EUR1,250. We confirm our Neutral stance We are raising our 2022e EPS estimates by c. 5% on the back of the strong 1Q22 sales beat, expected stronger 2Q 22e, and higher FX impact at 5.8% (4.3% previously). Our EPS increase is lower in 2023e and 2024e (+4% and +3% respectively) since we are reducing organic sales growth to factor in a worsening of the macro environment. Despite the increase in estimates, our TP is cut to EUR1,250 (from EUR1,415) due to higher WACC (6.7% vs. 6.3% previously) to incorporate higher risk-free rates. Hermes shares are down 30% y-t-d (vs. a median for our coverage of 16 stocks of -28%) and the stock is currently trading on a 12m forward PE of 39x, still at a premium of c. 10% vs. its pre-covid historical valuation of c. 35x, while the premium vs....
Following LVMH’s encouraging release, Hermès confirmed the buoyant environment of the luxury industry with 27% revenue growth (vs. consensus of 15%) in Q1 22 despite the uncertain macro backdrop. All regions reported better-than-expected growth, highlighting Asia and the Americas which posted growth more than twice the consensus. Although the resurgence of COVID-19 in China has resulted in some temporary closing of stores and reduced traffic, this has not yet changed the group’s expectations for FY22.
HERMÈS INTL. - BUY | EUR1300 Impressive Hermès sales growth in Q1 The leather goods business is back to growth Buy reiterated
A strong start to the year (sales release on 14th April) As with the rest of the sector, we expect Hermes to also report a strong start to the year, with 21% y/y growth in 1Q 22. This is an acceleration on the 3-year stack (61% vs. 42% in 4Q) compared to the previous quarter, when the company experienced production constraints. France and Europe should benefit from an easy comp as last year c. 30% of the store base was closed, while Americas is expected to remain strong in spite of inflation. APAC, in line with the rest of the sector, is expected to have been affected by Covid restrictions in China since March. We forecast leather goods to grow 13% y-o-y. Our detailed preview can be found on page 2. Increasing 2022-23e EPS by c. 5% following FY beat and FX. Introducing 2024e estimates We have slightly increased 2022-23e estimates, mainly due to the beat on FY estimates, more positive fx assumption (in FY 2022 at 4.3% vs. 2.5% previously), while leaving our overall organic growth estimates unchanged. We have also increased the FY 2022-23 margin, despite management caution about the sustainability of 2021 EBIT margin, as we believe at least 37% is the new normal for Hermes over 2022-24e. Our FY estimates already factor in a normalisation of trends in US and Europe. We estimate Hermes'' exposure to Russians is only 1% of sales and in our scenario of a military conflict not spreading outside of Ukraine, we do not foresee a material ''Guilt Factor'' amongst luxury consumers - not feeling comfortable to be seen buying/wearing luxury products - kicking in. We believe the true bear case scenario in Luxury would be China supporting Russia triggering sanctions, which in turn could lead to a negative sentiment/boycott of Western brands from Chinese consumers. TP unchanged at EUR 1,415; we confirm our Neutral stance We have slightly increased of WACC (from 6% to 6.3%), taking into account a higher risk-free rate and our target price remains unchanged. On...
Are renewed lockdowns in China a major threat to prospects for the luxury sector in 2022? This week, China has witnessed the highest number of Covid-19 cases since Wuhan in 2020, with daily cases nearing peak levels. Despite a more adverse macro environment, we expect further double-digit growth in China at 13%, again driven by the powerful trend of repatriation of purchases as we do not expect Covid-19 related travel restrictions to be lifted anytime soon. On that note, persisting restrictions on international travel are boosting duty-free sales on Hainan Island, with sales that almost doubled in 2021 and already accounting for 13% of China’s luxury goods market. Furthermore, LT catalysts, i.e. rising middle-class, increasing weight of the younger generations, etc., are still valid in our view. On average, Mainland China accounts for 23% of our luxury groups sample, even account for 25% of sales at the two Swiss watchmakers Richemont and Swatch Group.
HERMÈS INTL. - NEUTRAL | EUR1300 Production constraints should be solved in coming quarters The LG sales decline in Q4 is not an issue in our view Thanks to new workshops opened in 2021, production capacity will increase in 2022 1 300 TP unchanged
Hermès experienced another record year with revenue 33% ahead of FY19’s level and an operating margin of 120bp above consensus. However, sales in the leather goods division declined 5.4% yoy (2x worse than consensus) in Q4 21 due to capacity constraints. The outstanding growth in the first 9-months has left very limited flexibility on stock for the year-end trading. Hermès sees the very positive trend continuing going forward, the industry-leading pricing power will mitigate the inflation pressure.
HERMÈS INTL. - NEUTRAL | EUR1300 FY 21 sales in line with expectations, including deceleration in Q4 Strong EBIT gain As expected a sales growth deceleration Q4, due to leather production constraints FY 21 EBIT margin at 39.3% vs 38.2% expected Neutral recommendation reiterated
Building on over 10 years of outstanding results, Hermès expects top-line growth to continue its momentum, driven by 1/3rd volume, 1/3rd by price and 1/3rd by the perimeter. The analysts day highlighted that Hermès’ exceptional performance over the last 10 years was mainly driven by the Hermès women and men behind the brand and authentic artisanal model. The group will continue its commitment to reducing emissions to combat climate change, and biodiversity protection, resource rationalisation and recycling.
HERMÈS INTL. - NEUTRAL | EUR1170 VS. EUR1090 (-26%) Strong performance on medium term is very likely Confidence on top line momentum for medium term Slight margin erosion expected in H2 We lift our 22-23 earnings by 5% TP from EUR1090 to EUR1170
HERMÈS INTL. - NEUTRAL | EUR1090 VS. EUR1050 (-18%) Hermès management is confident for the rest of the year Hermès sales highlight, after LVMH one, that luxury demand is still high Europe and US drove the growth in Q3 Likely some deliveries issues in Q4 TP EUR1090 vs 1050
Hermès published consensus-beating results. All business lines and all geographical regions experienced a better-than-expected quarter. Unlike its industry peer, which recorded softer growth in Asia due to the COVID-19-related restrictions, Hermès reached 29% of sales growth in Asia, mainly driven by China. While we had been worried that the Chinese government’s ambition for wealth redistribution would hold back luxury spending, Hermès has proved with solid figures that, even though the growth in the luxury industry will be affected, it will be immune.
HERMÈS INTL. (NEUTRAL, TP EUR1050) | Q3 sales grew 31% organically
3Q 21 sales (21st Oct-21) should be strong, with no deceleration. 4Q should be softer We expect a strong quarter with sales of EUR 2,294mln (+27.4%, organic +26% and fx +1%). Organic revenues should accelerate to +35% vs. 2019, having benefitted from higher availability of supply, especially in Leather Goods (3Q: +15.5% y/y and +25% vs. 2019). However, we expect capacity constraints to lead to a softer 4Q (+6% y/y), especially for Leather Goods (+2% y/y). FY 2021 sales +39% and EBIT margin at 37.6%. 2021-23 EPS estimates increased by 25% We expect FY 2021 sales up 39% - implying +6% y/y in 4Q - and FY EBIT margin at 37.6%, or 34.7% in 2H 21 (-240 bps) accounting for higher opex in 2H 21, in particular AandP expenses (EUR 400mln in FY 2021). We have increased our EPS estimates for 2021-23 EPS by 30%/24%/22% respectively, on the back of the strong numbers we expect in 3Q and our confidence in the sustainability of structurally higher margins. Analyst Day on 8th Dec. Cash pile and FCF could allow for a more generous dividend policy Hermes will host an Analyst Day on 8th December in Paris, which we expect to be rather qualitative and possibly give more granularity on the increase in production capacity, a key driver for top line, especially for Leather Goods but also for other product categories where the company faces constraints. Hermes has several opportunities that can support its top line: 1) growth in leather goods including outside its icons; 2) diversification and development of other product categories; 3) retail network increase in terms of both store enlargements as well as openings; 4) e-commerce website. Given the cash pile (we estimate EUR 6.1bn at the end of 2021) and FCF generation (average EUR 2.2bn over the next three years), we believe an exceptional dividend is likely. We increase our TP to EUR 1,350. Maintain Neutral rating Following our estimates upgrade, we move TP to EUR 1,350. We remain Neutral after the strong price...
HERMÈS INTL. - NEUTRAL | EUR1050 VS. EUR890 (-19%) Far better than expected H1 leads us to lift significantly our earnings Gross margin gained 650bps 2021-23 earnings lifted by 12% New TP at EUR1050
After LVMH and Kering, Hermès also published an exceptional set of H1 21 results. All divisions reported triple-digit growth in Q2. In addition to the strong top-line momentum, the operating margin reached an all-time high (40.7% vs. 34.8% in H1 19), mainly thanks to relatively higher stocks from 2020, lower fixed costs and geographic mix. The group expect the re-acceleration in marketing spending and higher investment will normalise the margin in H2 21.
HERMÈS INTL. (NEUTRAL, TP EUR890) | H1 far above expecations
HERMÈS INTL. - NEUTRAL | EUR890 VS. EUR790 (-15%) Q1 sales performance leads us to lift our 2021-23 earnings by 7% Stellar Q1 leather goods performance cannot be extrapolated to the FY Production and distribution expansion in 2021 27% sales growth expected for FY 2021
Benefiting from the enduring strong appetites of Chinese and Japanese consumers for Hermès’ designs, the strong deliveries made at year-end and the diversifications in metiers, the group has reported another stunning Q1 21 performance. Despite the ongoing pandemic, the strong dynamic of luxury consumption and unwavering desirability of the brand will continue to drive the growth for the rest of the year; however, the group has confirmed that the higher investment in marketing will weigh on the operating margin.
HERMÈS INTL. (NEUTRAL, TP EUR790) | Q1 sales grew 44% at same FX in Q1 vs Q1 20
HERMÈS INTL. - NEUTRAL | EUR790 VS. EUR710 (-18%) FY 21-22 earnings lifted by 8% 2020 was far better than expected both on top line and EBIT FY 21 sales to grow 18% and back to 2019 profitability level likely Target price at EUR790 vs EUR710
Hermes International SCA
The outstanding year-end performance has led Hermès to end the year outperforming the industry yet again. The impressive sales growth in Asia including Japan in the second half of the year has proved again that Hermès remains the most desirable brand in the region.
Hermès has reported an impressive Q3 20 trading update after LVMH encouraged the market last week. The unrivaled desirability of the brand has driven an outstanding performance in Asia ex-Japan and a good improvement in Japan, enabling the group to be the first luxury player to turn to positive growth despite the ongoing pandemic. The group confirmed that the good trend has continued in October.
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