Despite the rapid growth of Cartier's parent company Richemont, Hermès remains the most stable luxury investment.
Is the Cartier Love bracelet poised to dethrone the Hermès Birkin bag as the luxury industry's single most shareholder-rewarding icon?
For a long time, Hermès has been the preferred choice for investors seeking luxury companies with stable, counter-cyclical growth, with the core confidence stemming from the enduring, robust demand for the Birkin bag. However, Hermès's recent business trajectory has been unusually weak. In contrast, Richemont, the owner of Cartier, has seen its revenue surge over the past 18 months.
Yet Hermès still holds a core advantage: the Birkin bag consistently trades above its official retail price in the secondary market. This indicates that market concerns about a decline in the appeal of this flagship product are exaggerated.
Cartier is currently experiencing red-hot performance, deeply favored by Generation Z, with its Love bracelet dominating social media. Taylor Swift recently wore Cartier jewelry at her wedding to NFL star Travis Kelce.
Richemont does not disclose individual brand revenue. According to Morgan Stanley estimates, Cartier's revenue has doubled since 2019, reaching 12.8 billion euros (approximately $14 billion) in the last full fiscal year.
There are no signs of cooling demand. Richemont's quarterly report last week showed that revenue in its Jewellery Maisons division, which includes Cartier, surged 24% year-over-year for the three months ending June, making it one of the fastest-growing segments in the luxury industry.
Cartier contributes the vast majority of this division's revenue. Richemont's other two major jewellery brands, Van Cleef & Arpels and Buccellati, are also growing rapidly but on a much smaller revenue scale than Cartier.
Cartier's product portfolio is perfectly suited to a K-shaped economic recovery: its top-tier, unique high jewellery pieces can command prices exceeding tens of millions of dollars, a price point even Hermès's finest leather goods cannot reach.
Surging stock markets have further inflated the wealth of high-net-worth individuals, fueling strong demand for ultra-high-end jewellery. However, as Bernstein luxury analyst Luca Solca notes, this super-high-end segment likely accounts for only 15% to 25% of Cartier's total sales.
The true engine supporting Cartier's overall performance is mass-market hit products like the Love bracelet, targeted at a broader income demographic. Ordinary consumers often spend $5,000 to $10,000 on a Cartier piece to commemorate significant life events like birthdays or graduations.
During the pandemic, as many leather goods brands aggressively raised prices, more consumers came to recognize that luxury jewellery offers better value retention than accessible luxury handbags, a trend from which Cartier has benefited.
In contrast, Hermès's recent operational performance has been volatile. When geopolitical tensions flared, the luxury sector sold off, and Hermès's stock price followed suit. After reporting disappointing first-quarter results in April, the company's share price is down about 20% year-to-date.
Revenue in its core Leather Goods and Saddlery division (which includes the Birkin and other bags) grew by only 9% year-over-year. While this figure appears acceptable, weak demand in its Ready-to-Wear, Watches, and Perfume segments has sparked investor anxiety.
Within the luxury industry, Hermès famously employs a "bundling" sales model for its Birkin bags. Given the extreme scarcity of Birkins, store associates typically require customers to purchase other items to qualify for the opportunity to buy one. While never officially stated, collectors report that clients who spend hundreds of thousands on homeware or tens of thousands on watches are prioritized for Birkin allocations.
This model drives sales across all product categories, ensuring stable overall growth, and has long underpinned Hermès's significantly higher valuation compared to its peers. Should Birkin demand wane, Hermès's revenue volatility would increase significantly, and its stock valuation appeal would diminish substantially.
Market skepticism is growing. Hermès's current stock price trades at 35 times forward earnings, down notably from around 45 times earlier this year. However, the secondary market provides a reassuring signal.
Bernstein's latest secondary price tracking data shows that auction premiums for Birkin and Kelly bags at Sotheby's and Christie's rose again in the second quarter. The average auction price premium over the retail price was 25% in Q1, climbing to 45% in Q2.
While Richemont's current revenue growth is faster, this positive trend is already fully reflected in its stock price. Richemont currently trades at 28 times forward earnings, about one-fifth above its three-year average.
Although Cartier has roughly doubled in size in recent years, the operating margin for its jewellery business has long stagnated around 30%, failing to improve.
Two inherent characteristics of the jewellery industry limit Cartier's margin expansion potential:
First, most consumers buy Cartier jewellery only once or twice in a lifetime, forcing the brand to continuously attract new customers. Therefore, product pricing cannot be raised excessively without risking the loss of a vast middle-class consumer base.
Second, Cartier must continuously invest heavily in advertising and marketing to maintain top-of-mind awareness, ensuring consumers think of the brand first when choosing a gift for a special occasion.
Richemont's performance is highly concentrated in its jewellery division: the operating profit generated by the Jewellery Maisons now exceeds the group's total operating profit (contributing 112%). In other words, the profitability of the jewellery business is offsetting losses generated by Richemont's watch and fashion brand segments.
Overall, the probability of Hermès repairing its fundamentals and returning to stable growth is significantly higher than the likelihood of Richemont's stock price surging substantially further from current levels.
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