Hermes

Stock price: €118.3
Conclusion: Still worth it. Although management’s new guidance is now in line with our last forecast (cf our June 8th comment), we think Hermes could do even better. We raise our valuation range to €115-€120 per share.

Q2 sales:+27% reported (+19.8% organic). H1 +22.8% (+20% organic). New guidance 2010: sales growth +10-12%- “Operating margin to improve at least by 100 bp”.

+10-12% growth for the year looks conservative.
-Hermes forecast implies only 5% growth in H2. We think Hermes should exceed it, helped by its stong momentum in Asia, the US and also Europe. The second quarter shows no slowdown. Comps in Q3 are more or less in line with Q2, up 20% this year. Q4 will be slightly more difficult with 11% growth reported last year.
-We look for 10% growth in H2, which should lead to +14.7% sales for the full year at constant exchange rate. Forex might add +6% to sales based on current rates. We forecast sales to reach €2310m in 2010 (+20.7%).

Operating margin could gain 130bp to 25.5%.
-COGS and administrative expenses should benefit fro the weakness of the Euro, more than offsetting a rebound in communication expenses and continuing increases in distribution spending.
-net earnings could jump +35% to €389m (+4% upgrade vs our previous forecast)

Hermes trades at 31.9x and 28.4xP/E based on our 2010 and 2011 forecasts. We think the premium looks sustainable (unique visibility, brand equity, potential for retail expansion), but difficult to further improve…Our valuation range (€115-€120 per share) assumes a stable premium for Hermes.

Hermes

Stock price: €107
Conclusion: We expect Hermes to report 30%+ EPS growth this year, driven by double digit organic growth compounded by a weak euro. Notwithstanding a 50% premium to peers, we think the stock looks worth it, based on our valuation range of €108-115 per share.

Q1 sales: up 18.5% to €508m (+20% organic). No guidance for 2010.

Sales could grow high teens this year…
-12% organic growth seems reasonable in light of +20% achieved in Q1. We think management is right to play down expectations following a strong Q1. Comps will be more difficult (Q1-5%,Q2+4%, Q3+5%, Q4+11%). However, 12% implies 9% for the rest of the year, which looks in line with the long term expansion profile of Hermes. The good news is the recent return to growth in Japan, which accounts for 22% of sales.
-Reported sales should be boosted by a weak euro. We estimate the positive impact at around +6+7% for the year.

Margin could gain 100bp, on our estimates (25.2%).
-Cost of goods “made in France” should definitely benefit from current exchange rates. We expect a gain of 120bp.
-Administrative expenses should also be contained by the weakness of the euro.
-Conversely, communication expenses should rebound from a low base last year, while selling spending should rise driven by retail expansion. Hermes plans to open 12 new stores and renovate 8 units in 2010.
Consequently we expact sales to reach €2265m, EBIT €571m and net earnings €377m (+31%) in 2010.

Hermes premium looks sustainable
-Unrivalled earnings visibility in the luxury industry, 2009 speaks for itself (sales +8% EBIT+3% Net earnings flat).
-Unique brand equity leads to premium pricing vs peers.
-Potential for retail expansion (304 stores vs 446 Louis Vuitton stores). Hermes owned only 181 stores early 2010, the rest belongs to franchisee.
- In addition to leather bags, watches, ready to wear and perfumes are gaining momentum. We feel that the appointment of a new designer, Christophe Lemaire, who revamped Lacoste, is good news for the women collection.
-US market and Asia Pacific still under-penetrated. Hermes projects to double its store network in China in five years (16 stores currently).
-Acquisition risk ? cannot be excluded with €500m of net cash. We are more convinced by management’s capacity to grow organically than by diversifications. The latest attempt with Wally Yachts led to write-off of more than €12m last year.

In conlusion, we think Hermes is worth its premium (29x and 26xP/E based on 2010 and 2011 estimates). We upgrade our valuation range up to €108-115 per share.

Hermes

Stock price: €94
Conclusion: 2009 once again reflects Hermes unique earnings visibility in the luxury good industry. Therefore we find justified the current 50% premium to the sector. Nevertheless, we think LVMH and Dior, PPR or Burberry offer superior potential return for the next 12m.

Sales 2009: Sales up 8.5% to €1.9bn, up 4% organic. Earnings guidance: net earnings in line with 2008 (EPS estimate 2009 €2.86). Looking for mid single digit growth in 2010.

As expected, Hermes outperformed the rest of the industry, increasing revenues by 4% last year against a background of -7-8% downturn for the industry, thanks to:
-upscale pricing which makes it relatively insulated to the crisis.
-a positioning conveying luxury craftmanship values rather than fashion
-a business model in leather bags based on scarcity helping to smooth earnings
-continuing expansion of its retail network (300 stores 60% owned vs 446 stores at Louis Vuitton)
-limited exposure to cyclical hard luxury (watches and jewellery)

Leathergoods growth was spectacular, up 16% organic, while silk products more than resisted with almost 6% growth. All regions grew, except for Japan which was down 11%. Asia Pacific excluding Japan accounts now for 22% of sales, the second largest destination behind Europe, which bodes well for 2010.
We think that Hermes offers long term high single digit growth rate in revenues, driven by the expected expansion of its network and the upside potential in apparels and hard luxury goods. Although we expect earnings to benefit from positive leverage, we expect bottom line growth to increase only slightly more rapidly than sales as it will be held back by increased operating expenses related to the network expansion and communication spending and higher depreciation charges.

Hermes trades at 30xP/E vs peers at 20x, implying a 50% premium to the sector based on 2010 estimates (EPS €3.18). Six months ago, Hermes was trading at an even higher premium, 2x average. Our DCF suggests a valuation around €100 per share. We think nonetheless that LVMH and Dior, PPR and Burberry offer higher upside in the next 12m.

Hermes

Stock Price : €103
Conclusion: Expensive but worth it.

Q2 sales up 12.2% (7.6% H1) reported, 3.9% (0.4% H1) organic. Management expects flat sales like for like for the year and a slight decline in operating profit.

Q2 sales release confirmed the improvement seen since the end of March, which indicates that Hermes is outperforming peers thanks to its upscale positioning. Leather bags sales increased by 21% in Q2, which is not sustainable, we’re looking for 10% increase for the year. The positive growth in silk (4.3%° and ready to wear (5.4%) is good news in Q2, while watches, tableware and perfumes continue to decline.
Asia Pacific excluding Japan is driving sales (+26% Q2 +22% H1) while France is recovering with sales up 5% in Q2 (0.5% in H1) compensating for continuing decline in the Rest of Europe.

We expect Hermes to continue to outperform peers in the next few months.
-First, Hermes client’s base seems to be relatively resilient in the current economic downturn.
-Second, Hermes values, based on durable luxury craftmanship rather than on fashion, seem to be more adapted to the current economic environment.
-Thirdly, the owned store network is doing well and more than offsets a depressed wholesale business.
-Last, hard luxury items, notably watches and jewellery, which are the most affected by the crisis, account for a minor part of Hermes sales.

As a result, we feel that management guidance is conservative and we believe that Hermes should be in position to achieve a slight increase in profit this year.

The stock trades at more than 2x the average multiple of the luxury sector, which is clearly not the best entry point. However, we think that Hermes offers a unique visibility in the luxury goods sector.

Hermes

Stock price : €96,7
Conclusion: Waiting for a better entry point

AGM follow up

Notwithstanding a very difficult environment in luxury goods, continuing subdued demand in Japan and in the US, Hermes is seeing some improvement since the end of March. As a result, management is looking for flat sales at constant rates this year, following almost 5% decline in sales in Q1. Forex should provide a further 6-7% boost to sales in 2009. Hermes is showing a superior resilience, notably in its core leather handbag business which represented 43% of sales last year. It seems that the upscale positioning of Hermes makes it “almost” immune to the financial crisis, at least in handbags. This is good news as we estimate that handbags account for more than 60% of Hermes profits. As a result, Hermes could be the only luxury good player posting positive results in 2009.
Longer term, Hermes offers double digit EPS growth prospect, driven by the continuing extension of the retail network (direct operated stores represent less than 60% of the total) coupled with product diversification, notably the watches division which is still very small compared with Richemont or Swatch.

In addition to expensive bags, Hermes trades at a huge premium to the sector. The stock trades 2x over luxury average multiples (32x and 28x 2009 and 2010 P/E) partly due to a superior earnings visibility but also to frequent speculations over changes in the capital structure.

Long Hermes at time of writing.