Hermès headwinds and what they spell for the wider luxury industry
Earlier this week Hermès’ womenswear designer Christophe Lemaire announced his impending exit from the ultra-luxe label to focus on his namesake collection.
This news, coming just days after the company undershot expectations in its latest quarterly performance, got me thinking about the rapidly evolving status quo forming for one of the star brands in the luxury galaxy.
Hermès, which started life as a saddlery in 19th century Paris, has certainly found itself at a crossroads – not least as a successor for Lemaire has yet to be announced.
As the FT reported last week:
Hermès said second-quarter sales totalled €963.4m, just below consensus estimates at €971m. In constant currency terms, sales growth was 9.6 per cent, below estimates at 11 per cent. But negative exchange rate trends took a toll, which Hermès said would depress operating margins when first-half profits are announced on August 29.
The company also noted that it had underperformed in both the world’s number one and fastest growing luxury markets, North America and Asia-Pacific respectively – although its important to remember that these returns remain markedly higher than those of many key rivals.
The ready-to-wear sales hitherto masterminded by Lemaire also slightly underperformed with 13 per cent year on year growth, whereas leather goods grew by 10 per cent in line with expectations.
So how to capture further growth given the global macro-headwinds now weighing on the industry? These are the three key questions facing the label:
1.) Should it continue its focus on growing ready-to-wear?
Lemaire did a strong job in forging a distinctive and elegant aesthetic that increased demand from leading buyers, but the brand is still best known for its coveted bags like the Birkin and Kelly which can go for thousands of dollars. The brand has diversified its portfolio which now encompasses watches and perfumes as well as silks and r-t-w – all hallmarks of a luxury lifestyle brand – but realistically clothes will never make up the lion’s share of sales. Exactly how valuable is its impact on overall brand equity? The next designer appointed to fill Lemaire’s shoes will speak volumes as to the group’s overarching strategy.
2.) Will they continue expanding production capabilities?
The group’s production capacity, rather than demand, has tended to dictate the pace of sales. A tight leash on supply has maintained an aura of exclusivity around Hermès offerings, but also tempered its ability to grow the business – including in core areas like e-commerce. The brand continues to have strong momentum and is opening two new factories in France in 2015 and 2016, but finding a sustainable balance will only get trickier as competition in the premium accessories space hots up amid haute luxe offerings from rivals such as Louis Vuitton.
3.) How to convince the market that the stock is not overvalued?
The graph above (which featured in this FT video on the expansion of luxury fashion back in April) reflects the meteoric multiples at which the Hermès share price in the last 20 years. But some analysts seem to becoming more cautious – see this excerpt from a Bernstein Research note published last week:
We maintain our Underperform rating on Hermes, given the unwarranted valuation multiple, in our view, despite its ultra luxury brand positioning and enviable brand momentum in the sector…We have reviewed our estimates leading to a 2% reduction in our FY14.
With the loss of its creative director, production bottlenecking and softening across the sector, will shareholders stay invested in the company’s growth?
In my view, the answer to all three of these questions is a resounding yes. Hermès is still a brand wielding a huge amount of product power and profitability. But the times are a’changing in the luxury sphere and brands across the spectrum are getting burnt as a result (think Louis Vuitton and Gucci, Mulberry and Coach to name but a few).
Several years ago it was far easier to talk about overarching trends defining and dividing winners and losers: namely the hi-lo bifurcation of the luxury market. Hermès sat in pole position as a non-logo centric player with a focus on accessories (good margins) and at the top of the pricing spectrum (making its core clientele demographic the ultra-high consumer, whose spending remains unswayed through economic peaks and troughs).
But even they are needing to think hard about next steps. Methinks a more granular company-by-company approach to the space will now be required, as opposed to sweeping ‘one size fits all’ conclusions. And I’m starting today with Hermès.