Hermes sales rise, with US prices rising 5% more than elsewhere

Hermes reported robust second-quarter sales of 3.9 billion euros, up 9% at constant currency, largely meeting analyst expectations and demonstrating continued strong demand for its luxury goods, particularly Birkin bags. The company is successfully navigating market challenges, having implemented price increases (7% globally, 5% in the US) to offset potential 15% tariffs, and its strategy of tight production control allows it to outperform rivals facing industry slowdowns. Executive Chairman Axel Dumas noted long-term potential in China despite current softness, while Hermes shares are up 2% year-to-date, outpacing the sector.

Analysis

Hermes has demonstrated significant resilience in a challenging luxury market, reporting a 9% rise in second-quarter sales at constant currency to 3.9 billion euros, broadly aligning with the 10% analyst consensus. This performance contrasts sharply with the wider industry slowdown affecting competitors like Kering's Gucci and LVMH's Louis Vuitton, who are facing declining sales. The company's unique strategy of tightly controlling production, with annual increases of only 6-7%, sustains brand exclusivity and pricing power, insulating it from broader market volatility. Management has proactively addressed trade risks by implementing price hikes—7% globally and 5% in the U.S.—which are expected to offset a potential 15% tariff. While growth in fashion and silk products has slowed, this was compensated by an acceleration in the core leather goods division. Despite a slump in China and Bain's forecast of a 2-5% decline in global luxury sales for 2025, Hermes's leadership remains confident in China's long-term potential. The company's stock performance, up 2% year-to-date, reflects this outperformance and solidifies its position as a defensive name in the sector.

Key Decisions for Investors

• Given Hermes's ability to deliver strong sales and proactively manage tariff impacts through price increases amid a contracting sector, the stock warrants consideration as a core defensive holding in luxury goods.
• Investors should closely monitor the sales growth trajectory of the leather goods division, as its accelerated performance is critical to offsetting the slowdown in other product categories.
• While management is optimistic about China, any signs of a structural change in consumer sentiment, rather than the current cyclical slump, should be treated as a major risk factor for the company's growth outlook.
• The stock's 2% year-to-date gain, outperforming the sector, suggests a valuation premium may be justified, but investors should compare its fundamentals against peers like Richemont to assess relative value.