Hermes Sneezes, and Global Luxury Might Catch a Cold

Market turmoil and a strengthening euro suggest tough times ahead for the whole industry.

You can never have too many handbags.

Unless you're Hermes International. The company's sales growth slowed in the final quarter of 2017, after surging demand all year left it low on stocks of leather goods. 

Fading Out

Hermes ended 2017 with slowing sales growth

That’s a nice problem to have. After all, Hermes is in the enviable position of being able to turn production on or off to slow or stimulate demand.

But there should be a note of caution for the broader luxury sector.

Firstly, sales growth that missed estimates in leather goods and silk -- the latter was particularly weak -- could suggest tourist spending in Europe was dragged down by a stronger single currency. If so, this could be a worrying sign for other big luxury groups.

Secondly, as Gadfly has noted, bling does best when stock markets are flying and consumers feel flush. Gyrations over the past few days could undermine top end spenders' confidence. Tax reform in the U.S. could cushion that blow, but it's too soon to tell.

As much of the recent rebound in luxury demand has been driven by China, the shine may have come off. The yuan sank the most since 2015 this week, in part because of trade figures that missed estimates -- a sign of potential further strain for travelers from the region.

LVMH and Swatch Group AG said Chinese demand was still strong. But that was before the recent global market turmoil.

Bond Street Prices

Hermes's valuation is at a significant premium to the Bloomberg Intelligence luxury peer group

For now, although Hermes' sales missed estimates, it says operating profitability for the full year should be close to that in the first half, when the margin reached a record 34.3 percent.

That should help it to retain its premium to the Bloomberg Intelligence luxury peer group -- it has one of the highest forward price to earnings ratios.

Whichever way you look at it, Hermes is a class act. If it is feeling the first tremors, weaker brands should beware.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Original Source Bloomberg