EUR 850.00 For Business Accounts Only

Morningstar | Hermes Delivers Solid Performance in 2Q; FVE Maintained

We are maintaining our wide-moat rating and fair value estimate of 364 EUR per share for Hermes International as the company reported solid first-half sales figures. We view shares as expensive. Revenues improved by 15.1% at actual exchange rates (versus 11.3%, our annual projection). At constant exchange rates, revenues improved by 12% in first-half 2019 and by 12.3% in the second quarter. Hermes expects a slightly lower operating margin for the first half of the year, dampened by an unfavorable hedging effect, but helped by operating leverage because sales growth remains strong (the company reports first-half results in September). Profitability in the second half will be affected by a higher level of investments, share-based compensation for employees and higher marketing spending. We expect an operating margin of 34.1% for the full year, versus 34.3% in 2018.

The leather goods division delivered 12.4% growth in first-half 2019 at constant exchange rates, driven both by volumes (with strong manufacturing productivity) and pricing. Management expects about 10%-11% growth for the division for the full year (versus 10%, our current forecast) with 7%-8% volume growth and 3% pricing effects. Growth is driven by both new and iconic bag models. Ready-to-wear and other Hermes sectors (which include jewellery and home products) continued to outperform the rest of the divisions with 16.9% and 20.8% growth in the second quarter respectively (at constant exchange rates). Hermes ready-to-wear and footwear collections have recently been well received by consumers, but we believe this segment is more prone to volatility related to fashion risks. We think the recent strength of Hermes in jewellery and watches is interesting as it remains to be seen if the brand can firmly establish itself in these areas with strong specialist market leaders.

Geographically, all regions contributed positively to performance. Asia, excluding Japan, remained a standout in the quarter with 18.6% growth (an acceleration from 16.9% growth in the first quarter), with strong performance across countries and no significant effects from the Hong Kong protests yet. Chinese demand remains strong with no change in dynamics in the quarter.