Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

In an episode of Sex and the City, public-relations executive Samantha was so desperate for a Hermes Birkin bag that she was prepared to use the name of one of her celebrity clients to jump the waiting list. 

That was in 2001. These days, she might not have to try so hard.

Hermes, known for its handbags that are at once expensive and exclusive, is steadily increasing the production of its leather goods.

This has helped the French luxury group deliver a better-than-expected performance in the second quarter.

Hell for Leather
Leather goods accounted for about half of Hermes sales in its second quarter
Source: Company report

It has also sent a ray of hope through a luxury goods market that's under pressure from slowing world economies, uncertainty created by Brexit and weaker tourist demand after recent terrorist attacks. Indeed, data this morning showed Swiss watch exports fell for the 12th consecutive month, and registered their biggest-ever drop in the first half of a year.

It's a different picture for Hermes. Sales of leather goods rose 17.1 percent, excluding currency fluctuations -- ahead of all other divisions.

Hermes normally keeps the supply of its most iconic bags below demand, boosting their scarcity and lengthening wait times for purchase. But lately, it's been gradually lifting output to tap that demand.

That's a smart thing to do in the current environment. When even high-end consumers are being more cautious with their money, Hermes can still find buyers of its classic leather goods.

That's not the case at its other divisions. Sales of clothing and its famous silk scarves, its second- and third-biggest divisions, shrank in the period, so a boost to handbag production can offset that.

This isn't a risk-free strategy. By upping production, Hermes loses some of the cache that put it in a position to be a plotline for a hit television show. 

It isn't the only luxury group facing this tension. It's particularly acute for many brands, and they're having to dig deep for growth. One issue is consumers' increasing comfort with buying luxury goods online, something that's not an obvious fit with an industry that aims for exclusivity.

So far, Hermes appears to be striking the right balance. Part of the increase in production is for bags other than the most iconic models, so that should limit any detriment to the brand.

It's also successfully navigated some tricky situations in the past, teaming up with Apple to produce a Hermes branded smartwatch. That did little to diminish its aura of exclusivity.

But bags are a more delicate matter. While watches were about 3 percent of sales in the second quarter, leather goods accounted for more than half.

In the Bag
Hermes's forward p/e ratio has consistently traded at a premium to peers
Source: Bloomberg Intelligence

The shares rose 3 percent in early trading, so investors don’t seem overly concerned at the moment.

They trade on a forward price-earnings ratio of 33 times, almost double the average for the Bloomberg Intelligence luxury peer group.

That premium looks deserved. Although Hermes has warned that sales growth this year could be below its medium-term target of 8 percent, and has cautioned that leather goods growth won't be so spectacular in the second half, that should still compare well with forecasts of a flat overall luxury goods market.

The risk will come when the market becomes more buoyant again. That looks a long way off right now.

Hermes looks like it's mindful of the dangers of squandering its long-term prospects for short-term gain. It should be, given a premium that looks as pricey as one of its classic Kelly handbags. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net