Morningstar | Hermes' Performance Continues on a Strong Track Across Geographies; Fair Value Estimate Maintained
We are maintaining our fair value estimate of EUR 332 for wide-moat Hermes, as the company reported nine-months revenue slightly above our full-year expectations. We continue to regard shares as expensive at these levels. Revenue increased by 11% at constant exchange rates in the nine months of 2018 versus our expectations for 9% growth. As in previous quarters, growth was predominantly volume driven, with little price and scope effect.In the quarter, Hermes saw acceleration in its Leather Good and Saddlery business to 11.7% versus 8% growth in the first half of the year helped by increasing productive capacities. For the full year, the company still expects to achieve 9% growth in this division, in line with our forecasts. Although the comparison base for the fourth quarter looks unchallenging (only 4.6% constant currency growth), management doesn’t expect significant acceleration given capacity constraints. The company noted that the demand across geographies remains solid with no deceleration of Chinese buying. In October the company launched its first Chinese e-commerce website, which delivered positive results so far, but Hermes remains cautious about e-commerce partnerships with other players.
Geographically, Americas was the strongest region, with broad-based strong performance delivering 14% constant currency growth in the quarter, versus 12.4% in the first half. Asia-Pacific (excluding Japan) delivered 11.7% in the quarter, decelerating somewhat from 14.9% growth in the first half. Europe also slowed to 5.6% growth in the quarter, versus 7.8% in the first half. Japan continued to surprise on the upside at Hermes with 8.1% quarterly growth, versus 6.8% in the first half, despite deceleration of Japanese demand to more normalized levels, remarked by some peers.
Other Hermes sectors performance remains standout with over 20% growth in the quarter and over nine months, with notably strong performance in jewelry. Ready-to-wear collections continue performing strongly with mid-teens growth. Silk and textiles and perfumes were affected by challenging comparison base in the quarter and saw slight declines at constant exchange rates.
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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