For decades, fashionistas have known that a Birkin bag is a safe style bet -- if you can get your hands on one. That demand makes its producer, Hermes International SCA, (RMS) the surest bet in the luxury industry when it comes to sales growth.
With waiting lists that can run more than a year for a $10,000 purse, demand for Hermes handbags shows how the Paris-based company, which analysts estimate will report record revenue tomorrow, is capable of determining its own financial performance.
Unlike LVMH Moet Hennessy Louis Vuitton SA, (MC) which last month reported stagnant revenue growth at its fashion and leather-goods unit, Hermes sales are constrained mainly by manufacturing capacity and the brand’s own desire to remain exclusive. While the industry will struggle to accelerate growth this year, sales at the very highest end of luxury -- Hermes’s domain -- are forecast to outperform the rest. That leaves Hermes well-placed to meet estimates with its stable of classic and coveted designs.
“The limit to what Hermes sells is how much it can produce,” said Luca Solca, an analyst who heads luxury-goods research at Exane BNP Paribas in London. Revenue “is what they decide it’s going to be.”
Hermes, which in November raised its forecast for 2012 organic revenue growth to more than 13 percent, has met or exceeded its own annual sales target each year since at least 2007. In the past two years, quarterly revenue has increased at a pace ranging 13 percent to 22 percent, at constant exchange rates, compared with 6 percent to 15 percent at LVMH.
After a dip last year, Hermes shares have advanced 8 percent in 2013, outperforming a decline in LVMH stock in the same period. Hermes shares have risen 157 percent in the past three years, exceeding gains of 75 percent for LVMH and the almost doubling of Gucci owner PPR SA.
Hermes shares were down 1.50 euros, or 0.6 percent, at 244.85 euros as of 10:41 a.m. today in Paris trading.
The stock trades at 34 times estimated 2013 earnings compared with 16 times for PPR and 17 times for LVMH. That’s even after the shares fell 1.8 percent in 2012, trailing the Bloomberg European Fashion Index’s 30 percent gain.
The expensive rating has deterred analysts from recommending the stock. Only one of the 21 tracked by Bloomberg recommends buying the shares, compared with 12 who rate them sell. Main First Bank’s Gael Colcombet, who rates Hermes outperform, declined to comment, citing company policy.
The so-called absolute luxury segment in which Hermes competes is the fastest-growing part of the market and will outperform the rest until at least 2014, Bain & Co. estimates. Chinese consumers are becoming more sophisticated and discriminating, prompting brands such as LVMH’s Louis Vuitton and Gucci to raise prices and use more-expensive materials to appear more exclusive, said HSBC analyst Antoine Belge.
While the shift plays to Hermes’s strengths, the company hasn’t rushed to exploit it. Rather than expanding leather-goods production aggressively, Hermes has limited supply to protect its image. Being too accessible can lead to “banalization” and the company’s backlog of bag orders has probably helped insulate it from the weakening world economy, Chief Executive Officer Patrick Thomas has said.
“It’s a pretty good strategy,” said Thomas Mesmin, an analyst at CA Cheuvreux in Paris. “By keeping production low, it provides strong pricing power” and maintains desirability.
Birkin bags have been synonymous with style from the moment Jane Birkin told former Hermes CEO Jean-Louis Dumas what she wanted in a bag, serving as the muse for its creation. The bags take hours to make by hand by skilled craftsmen in France and each bag is signed by its creator. That, along with being famously impossible to obtain immediately if your name isn’t Gaga or Kardashian, has held their place in the upper echelon of timeless fashion.
Increasing capacity by only 10 percent a year almost ensures annual leather-goods sales growth of at least 10 percent, excluding currency swings, “which is exactly what investors are looking for,” Mesmin said. Leather goods account for about half of Hermes’s revenue.
The deliberate constraint of supply has helped ignite a vibrant secondary market for Birkin bags. Because the products are hard to get hold of, “consumers don’t pay attention to price,” said Yann Le Floc’h, a former sales trader at Exane BNP, who founded online marketplace instantluxe.com in 2009. “They want to have the product now. They don’t want to wait.”
Instantluxe, where people can buy Hermes bags on a secondary market, lists a 40 centimeter Birkin at 9,000 euros, about 20 percent more than it costs in Hermes’s stores in Paris. Le Floc’h expects the price of Hermes’s Kelly and Constance bags to increase on the secondary market as they become more popular.
Hermes may say tomorrow that 2012 sales rose 15 percent to 3.42 billion euros, excluding currency shifts and acquisitions, analysts surveyed by Bloomberg predict. Revenue may have gained 13 percent in the fourth quarter, the estimates show. That compares with increases of less than 9 percent in the last three months of last year at Burberry Group Plc (BRBY) and 5 percent at Cie. Financiere Richemont SA and and LVMH’s fashion and leather-goods division.
Hermes’s choice to underexploit the brand partly explains why LVMH built up a stake in its rival, said Exane BNP’s Solca. LVMH, which owns 22.3 percent of Hermes, sees that it “can extract significantly more value from the business than the current shareholders have chosen to do,” the analyst said.
Speculation that LVMH may ultimately buy the company and a shortage of freely traded stock has inflated Hermes’s share price, according to HSBC’s Belge. Descendants of Hermes’s founder hold about 69 percent of the shares, individually or collectively. Excluding LVMH’s stake and other long-term holdings, the freefloat is only 6 percent, according to Solca.
“There is little interest in the stock because there’s no liquidity and it’s pretty expensive,” said Mesmin. While non-family investors that own Hermes shares will likely hang on to them until LVMH knocks on the door, “whether Hermes reports 13, 14 or 16 percent growth, the stock won’t react dramatically.”
With the company maintaining a tight rein on production and shoppers showing no lack of appetite for the latest luxury pieces, that sales improvement looks pretty much assured.
Like the price, which is inaccessible to most consumers, “having to wait for a Birkin makes it more exclusive,” said Fflur Roberts, head of luxury-goods research at Euromonitor. “The fact that they haven’t spread themselves too thin or made themselves too accessible protects them.”
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