Can Hermès Sustain Growth Despite 56% Stock Surge in One Year?

Projections by the Boston Consulting Group indicate a promising 6% growth in the luxury goods market from 2022 to 2026, fueled by the increasing middle-class population in emerging markets, particularly Asia, and younger generations, such as Millennials, Generation Z, and Generation Alpha.

The French company Hermès is quite popular among investors who wish to get exposure to the luxury market. In the first quarter of 2023, the company’s consolidated revenue surged to €3,380 million, displaying an impressive 23% growth at constant exchange rates. Moreover, all geographical areas experienced robust growth, with the network expanding through new store openings, new extensions, and increasing online sales.

Since the 25th of July 2022, the share price has been up more than 56% and reached its all-time high in April 2023, above the 2,000 euros per share. In recent weeks, however, the share price seems to be losing upward momentum. Prices were unable to form new highs and they moved below the Ichimoku cloud with an RSI below its moving average and the 50-level. But will the next earning release support the share price? Will the share price be able to continue rising?

What Are the Strengths of Hermès?

Investing in Hermès stock can be a lucrative opportunity due to its prestigious luxury brand with a global reputation for excellence.

The company maintains consistently high-profit margins, thanks to its strategic positioning in the high-end luxury market and unwavering demand for its products. Hermès has shown remarkable resilience during economic crises, adapting quickly to challenges like the COVID-19 pandemic, which reflects strong management and long-term potential.

Moreover, Hermès outperforms competitors in critical markets, especially in the rapidly expanding luxury market in China and new countries, where there is significant potential for further growth and increased demand for its products as the middle class is booming and demand for luxury products is growing.

The brand’s carefully planned expansion strategy is centered around maintaining the highest product quality and fostering unwavering customer loyalty. This approach ensures that every purchase made from Hermès exudes a sense of luxury and prestige. By focusing on crafting impeccable products and nurturing strong relationships with its customers, Hermès continues to solidify its position as a top-tier luxury brand in the market.

This commitment to excellence not only enhances the brand’s desirability but also creates a lasting impression on its clientele, making it an attractive investment opportunity for those seeking to capitalize on the allure of luxury and exclusivity. Moreover, Hermès’ diversification into new product categories, such as items for the home, offers potential for further revenue growth, providing investors with promising prospects for the future.

Investors also find Hermès’ dividend policy quite interesting, as the company has been consistently raising its ordinary dividend since 2018, starting from 4.55 euros and reaching 13 euros per share last year.

What Are the Risks of Investing in Hermès?

Hermès, despite its recent resilience in the face of global inflation and uncertain economic growth, remains sensitive to economic downturns due to its luxury brand status. While considered somewhat defensive in the luxury sector, a decline in sales may occur during economic slowdowns as consumers reduce spending on luxury goods.

As a global brand, Hermès faces currency risk from fluctuating exchange rates, which can affect its financial performance.

A stronger euro can lead to lower sales and profits when revenues in other currencies are converted, making its products more expensive for international customers. Additionally, sourcing raw materials abroad with a stronger euro can increase expenditures, impacting profit margins. In the first quarter of 2023, currency fluctuations resulted in a negative impact of 21 million euros on the company’s revenue.

Similar to other companies, Hermès is susceptible to supply chain disruptions arising from natural disasters, geopolitical events, or shifts in demand or supply. These disruptions can result in higher costs, diminished profit margins, and have a negative impact on the brand’s reputation and customer loyalty.

Should Investors Bet on Hermès?

At the end of 2022, while some other brands saw sales decline in certain regions, Hermès reported impressive sales growth worldwide. The company has proven its ability to handle uncertainties like the Covid-19 pandemic and risks affecting global growth.

“The group has moved into 2023 with confidence, thanks to the highly integrated artisanal model, the balanced distribution network, the creativity of collections and the loyalty of clients,” as explained by the company in its quarterly information report at the end of March.

Investors eagerly await the Q1 2023 results, set to be released on July 28th, to assess if Hermès shares continue to show potential for growth, considering the impressive 56% surge in the past year. Hermès shares are still relatively expensive, particularly when compared to other French luxury companies like Kering. For some investors, especially those with limited funds, investing in Hermès might not be the best option for exposure to the luxury market.

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