Morningstar | Hermes Delivers Strong 1H Results Despite Capacity Constraints in Leather Goods; FVE Retained
We are maintaining our fair value estimate for wide-moat Hermes, as the company reported second-quarter sales slightly ahead of our full year expectations. Sales growth remained predominantly volume-driven with minimal impact from price increases and selling-space expansion.For the first half of the year, sales of leather goods were marginally below our full-year expectations (8% versus 9% in our forecasts), more than offset by very strong growth in ready-to-wear and other Hermes sectors, which include jewellery and home products. The company forecast first-half profitability to be close to last year’s figure (excluding a nonrecurring gain on sale of real estate in 2018), through a positive currency impact on margin and as strong demand drives up capacity utilization and operating leverage.
Regionally, Asia-Pacific excluding Japan, Americas, and other regions performed the strongest, while growth in Europe and Japan was more moderate but still solid at 9% and 6%, respectively. As capacity in the company’s core leather goods segment remains constrained (the company forecasts 7%-8% growth in volumes and 1% pricing impact for the year), Hermes takes advantage of continuing strong global demand by expanding other group segments. In line with luxury peers that reported previously, Hermes has so far not seen any deceleration in Chinese demand following recent market turbulence and currency depreciation.
Hermes International is engaged in the manufacture, sale, and distribution of luxury goods primarily in France, rest of Europe, Japan, Asia-Pacific, and Americas. Co.'s activities can be divided into two segments: the distribution via Co.'s exclusive network and the distribution via specialist outlets. The distribution via Co.'s exclusive network comprises silks and textiles, leather goods and saddlery, ready-to-wear and fashion accessories (men and women's clothing, belts, jewellery accessories, gloves, hats and shoes), and other goods (jewellery and products of the art of living department). The distribution via specialist outlets comprise perfumes, tableware and watches.
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