Hermes: China Exposure And Growth Deceleration (Rating Downgrade)

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Hermes has achieved exceptional growth and profitability through a strict strategy, scarcity focus, and high net worth customer base, outperforming peers significantly.Despite impressive performance, ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nHermes: China Exposure And Growth Deceleration (Rating Downgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-14 00:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4726480-hermes-china-exposure-growth-deceleration-rating-downgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Hermes has achieved exceptional growth and profitability through a strict strategy, scarcity focus, and high net worth customer base, outperforming peers significantly.Despite impressive performance, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4726480-hermes-china-exposure-growth-deceleration-rating-downgrade\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"HESAF","symbol_name":"Hermes International SA","start_time":0,"source_url":"https://seekingalpha.com/article/4726480-hermes-china-exposure-growth-deceleration-rating-downgrade","article_id":"2475825048","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2137200116/image_2137200116.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2475825048","pubTimestamp":1728836292,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Well, for starters, growth decelerated sharply, from mid-twenties organic growth to mid-teens and now low-teens. Additionally, investors sought sanctuary in those luxury names and pushed valuations to extreme records, which wasn't sustainable heading into a tougher stretch. Lastly, hopes for a major uptick from China didn't come to fruition, leading to industry-wide downward revisions. With that in mind, it's actually quite impressive Hermes shares are still trading close to all-time highs. It makes more sense when looking into the company's results. Hermes Separated Itself From The Pack In H1'24 It's one thing to grow faster than peers when everything is going well in the sector, and Hermes did just that for a long time, with a 15% sales CAGR over the past decade, compared to LVMH at 11%, Kering  at 6.5%, or Richemont  at 8.5%.    Hermes H1-24 Presentation It's another thing to grow at a double-digit pace while your peers are seeing the","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"HESAF":"Hermes International SA","HESAY":"Hermes International SA"},"translate_title":"爱马仕：中国风险敞口和增长减速（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HESAF":0.9,"HESAY":0.9},"content_text":"Hermes has achieved exceptional growth and profitability through a strict strategy, scarcity focus, and high net worth customer base, outperforming peers significantly.Despite impressive performance, growth deceleration, margin declines, and high exposure to China present risks, making it hard to justify a 'Buy' at current valuation.Hermes' valuation is at peak levels, and with expected tougher market conditions, leading to a downgrade to 'Hold'.The upcoming Q3 report is crucial for assessing near-term growth and mid-term outlook.   yuelan Hermes (OTCPK:HESAF) (OTCPK:HESAY) has been the best-performing luxury stock over the past decade, and by a wide margin.  Driven by a strict strategy, lack of greed, and a relentless focus on scarcity, Hermes was able to outgrow its peers while achieving record profitability. With a customer mix that has the highest exposure to true high net worth individuals, and multiple product lines with demand that far exceeds supply, Hermes maintained double-digit growth in a year where luxury peers are tumbling.  Despite all that, at the current valuation, and with a growing set of risks, I don't see enough upside to justify a 'Buy'. Let's dive in. Recapping Almost Two Years Since The Luxury Peak I started covering Hermes on Seeking Alpha back in July of 2023. At the time, we were at what I call 'Peak Luxury'.  Back then, other retail categories and the overall economy showed signs of weakness, with pressure on profitability and growth, as inflation was hitting hard and demand was declining.  While that was happening, it seemed like the luxury sector is shrugging off all these headwinds, as companies like LVMH (OTCPK:LVMHF), Moncler (OTCPK:MONRF), and of course, Hermes, were still growing at a rapid pace. Data by YCharts As you can see, that mid-2023 point is right where many luxury companies reached their peak, and although for Hermes this isn't the case, its stock is only up 7% during that timespan, significantly underperforming the market.  So, what happened? Well, for starters, growth decelerated sharply, from mid-twenties organic growth to mid-teens and now low-teens. Additionally, investors sought sanctuary in those luxury names and pushed valuations to extreme records, which wasn't sustainable heading into a tougher stretch. Lastly, hopes for a major uptick from China didn't come to fruition, leading to industry-wide downward revisions. With that in mind, it's actually quite impressive Hermes shares are still trading close to all-time highs. It makes more sense when looking into the company's results. Hermes Separated Itself From The Pack In H1'24 It's one thing to grow faster than peers when everything is going well in the sector, and Hermes did just that for a long time, with a 15% sales CAGR over the past decade, compared to LVMH at 11%, Kering (OTCPK:PPRUF) at 6.5%, or Richemont (OTCPK:CFRHF) at 8.5%.    Hermes H1-24 Presentation It's another thing to grow at a double-digit pace while your peers are seeing their growth declines, and again, Hermes is doing just that. In the first half of 2024, Hermes' revenues grew 12%, or 15% organically. Meanwhile, LVMH and Richemont saw their sales decline by around 1%, and Kering revenues dropped by 11%.   Hermes H1-24 Presentation Hermes was also able to maintain gross margins above 70% and operating margins close to 42%, albeit they declined by about 2% since the prior year period, primarily due to foreign currency pressures.    Hermes H1-24 Presentation The bottom line is, Hermes is undeniably the sector leader, with industry-leading performance by a widening gap. At this point, comparing Hermes to others might be ill-advised, as it could paint a picture of 'everything is perfect', whereas for Hermes standards, it isn't necessarily so. Exposure To China  The one big flaw for Hermes is that it's one of the most exposed luxury companies to China. In fact, Hermes generates nearly 50% of its sales in Asia Pacific (mostly China), and the Chinese customer is presumably responsible for even more than that, as they like to shop overseas as well.   Hermes H1-24 Presentation It's not a secret that China isn't perceived as the steadiest most predictable economy in the world, but it seems like one thing does remain true - they like to spend on luxury. That is why the recent stimulus news pushed Hermes shares sharply higher, although I argue it's not that obvious they will help demand for luxury improve.  Growth Deceleration It feels wrong to say a company that's growing at a double-digit pace is having growth problems, but some companies are held to a higher standard.    Created by the author using data from Hermes financial reports. Looking on revenues on a geographic breakdown, we can see that the most important geographies in Asia Pacific and the Americas, have decelerated materially in 2024. It remains to be see whether much easier comps in the upcoming quarter will support an acceleration, but it seems unlikely.   Created by the author using data from Hermes financial reports. Another somewhat worrisome picture emerges when looking at the product categories. We can see that the best performers are Leather Goods, Accessories & Ready-to-wear, and Other Products. Those are the three largest categories, and by and large, these are the categories where I view Hermes is on \"auto-pilot\". Demand there is much higher than supply and it's possible that Hermes is increasing supply to offset declined in other categories.  One of the main reasons that has led me to upgrade Hermes is that their growth became more diversified, and this is a reversal on that trend. Trend Reversal On Margins Since 2015, Hermes' margins were on a steady upward trend (excluding the COVID year). As shown in the 10-yr CAGR graph above, profits outpaced revenues by nearly 5 points in that period.   Hermes H1-24 Presentation In 2024, we can see margins are declining. This is a result of foreign exchange headwinds, as well as declining growth. On the growth part of things, this reflects less advantages on scale, and less price taking.  If growth is decelerating and margins are declining, it'll be hard to support market-beating returns. Which leads us to the next section. Valuation & Outlook Hermes is currently trading at 48 times forward earnings, and 42.5 times '25 estimates. Those estimates reflect 11.6% revenue growth, which is in line with 2024, and a slight improvement in margins. I view those estimates as reasonable.  It could be argued that in a better macro environment Hermes can see meaningful growth acceleration back to the mid-teens, but I find it unlikely at its current scale. I also don't see a significant macro improvement in the horizon. Data by YCharts As we can see, Hermes is currently at peak valuation, when ignoring 2020. I think it's hard to justify peak valuation in light of an expected tougher stretch and worsening trends.  Yes, Hermes as a business will continue to do exceptionally well, but I find it hard to envision a path to significant returns in the near-to-mid term. I should note that the third quarter is a very key catalyst, as we'll learn how easier comps drive near-term growth, and hopefully gain more insight from the company on recent trends, specifically their thoughts about China. Conclusion Hermes remains in a league of its own when it comes to luxury fashion, as evidenced by its far superior results compared to peers. Still, there seem to be some cracks in this historically impeccable story, as some geographies are declining and several product segments are declining. We're approaching a defining Q3 report which could determine where shares go in the near term, as well as provide insight into the mid-term outlook. At peak valuation, I believe the reward isn't sufficient to maintain a 'Buy', which leads me to downgrade Hermes to 'Hold'.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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