Hermes: Sales Growth Remains Solid, Helped by Pricing and Resilient Volume

We are maintaining our fair value estimate of EUR 990 per share for wide-moat Hermes RMS as the company reported strong first-quarter sales, helped by continued solid volume growth and price increases.

Revenue was up 23% organically, with pricing contributing around 7% to growth and little perimeter effect; this was a stronger showing than LVMH’s fashion and leather division’s 18% quarterly increase. Notably, the biggest and capacity-constrained leather goods division grew 18.5%, above the 14% that the 7% price increase and long-term target of 6%-7% volume growth would suggest. The stronger performance was explained by better manufacturing capacity utilization (first quarter of 2022 was still affected by COVID-19 constraints), strong pace of deliveries, and a strong Lunar New Year. We believe the division has been exceeding its capacity plus pricing growth targets for several years now, thanks also to drawing from inventory, which would need to eventually be replenished (in 2022, inventory days stood at 192 versus 215 over the past 10 years). Other segments continued performing strongly; notably, ready-to-wear sales grew 34.4% (potentially helped by the recent so-called “quiet luxury” trend that favors more classic, less logo-heavy designs), and the “other” segment, which includes jewellery, grew 28.3%, continuing a strong streak of performance (31% average growth over five years).

Surprisingly, Hermes’ sales were strong in the Americas region at 19.2% growth, on top of 44% growth in the first quarter of 2022 and despite only a modest 3% price increase in the region. This seems much better than figures reported by LVMH (8% growth in the United States, driven largely by Sephora, with weak cognac and decelerating fashion and leather). Sales in Europe were up 24%, helped by tourist demand from the U.S., Middle East, and South Asia, as Chinese tourists are yet to return to the region. Sales in Asia were strong, up 23%, maintaining momentum from the fourth quarter.