Hermès’ winning style is hard to replicate

Au sommet. Hermès International’s bling allure has reached new heights. Shares in the purveyor of $10,000-apiece Birkin bags shot up to a record high after the $246 billion French group reported an 18% jump year-on-year in quarterly sales, and proposed a chunky extra dividend. By outshining rivals like LVMH or Gucci owner Kering, CEO Axel Dumas has dissipated concerns about high inflation and the slowing Chinese market. His rivals will find it hard to replicate his winning model.

Hermès’ association with exclusivity was not built overnight. The brand was founded in 1837 as a harness workshop for the French aristocrats. Six generations later, the family-controlled group’s fortunes are still linked to leather goods, which along with saddlery made up 41% of its 13.4 billion euro revenue in 2023. These goods have higher profit margins than other fashion items. They are also less sensitive to seasonal factors, making production planning easier and less costly. The iconic Birkin bag, for instance, has been on sale since the mid-1980s.

A second strength comes from the fact that, contrary to several other luxury brands, Hermès targets the super wealthy and does not sell items on discount. Kering-owned Gucci, Burberry or Prada, on the other hand, tend to rely on buyers who stretch their budget to shop. These customers have been more negatively impacted by rising prices.

Thirdly, the carefully orchestrated relative scarcity of Hermès’ products means shoppers will hold on to them, helping to further augment their value. According to e-commerce platform Rebag’s 2023 report, used Hermès totes and pouches sell for about 110% of their original price, against 57% for Prada bags or 41% for Valentino.

Granted, Hermès has some vulnerabilities. Nearly half of its revenue comes from the Asia-Pacific region, excluding Japan. That’s probably chiefly China. Should East-West geopolitical tensions suddenly escalate, a chunk of revenue could be at risk. Hermès’ record-high operating profit margin, now at 42%, underpins the brand’s stellar valuation. Should it slow down, its share price, at 48 times its 2024 earnings and nearly twice LVMH’s 25 times multiple, would suffer.

Louis Vuitton, LVMH’s largest brand, may however have some common traits with Hermès. HSBC predicts that the EBIT margin at the Neverfull tote maker, which Bernard Arnault’s conglomerate does not disclose, could surpass 54% by 2025.

That suggests Hermès can still find ways to remain at the top.