Apr 19, 2018
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Hermès overtakes Kering in market cap on Paris Bourse

Apr 19, 2018

Hermès has overtaken Kering in terms of market capitalization on the Paris Bourse, even though its annual sales are less than one third of those of the giant luxury conglomerate.

Hermes - Fall-Winter2018 - Womenswear - Paris - © PixelFormula

Remarkably, the annual revenue of Kering’s biggest brand, Gucci, is larger than Hermès' total annual turnover. However, investors are clearly attracted to Hermès' rich and thick bottom line; its uniquely prestigious brand name and the continued pent-up demand for its top-line products, from its 7,000 euros Hermès dressage saddles to its 20,000-euro-plus crocodile Birkin bags. Gucci closed out 2017 with revenues of 6.2 billion euros, or roughly 40% of the annual turnover of the Kering group. Hermès by comparison scored annual revenues of 5.559 billion euros in 2017.
At noon Thursday morning on the Paris Bourse, Kering’s share price of 431 euros gave it a market cap of 54.41 billion euros; while Hermès' share price of 518 euros meant it had a capitalization of 54.68 billion euros. A truly astounding sum, representing almost ten times its annual turnover. While the heavyweight champion of fashion and luxury, LVMH, had a noon share price of 279.90 euros and a market cap of 141.37 billion euros.

“Hermès is clearly a very, very well-valued share by investors. Plus, we have had a couple of stronger quarters in luxury with everything going well,” said Luca Solca, the expert luxury analyst at Exane BNP Paribas.
Remarkably, the overtaking comes at a moment when all three luxury companies posted massive gains in their share price.
Hermès' share price has galloped ahead 23% from barely 420 euros on February 9 of this year. In exactly the same period of time, Kering grew by 18% and LVMH advanced 20%.
However, Solca cautioned that the market was probably at its peak, due to the recent very strong trading environment and fears about Chinese consumer confidence.
“Due to the difficult relationship between Mr. Trump and China, there is a real concern he could deflate that buoyancy in Chinese consumers and as a result demand for luxury will fall. In that environment Hermès shares are better to own. Because we have noticed that when the luxury sector booms, Hermès tends to underperform. When people are a little more concerned about the market, an institutional brand like Hermès overperforms. So we expect over the next couple of quarters that Hermès will be more stable and resilient, along with LVMH and Brunello Cucinelli,” argued Solca.
A key element in Hermès' stock price is its particularly handsome margins. The storied house on the Faubourg St Honoré scored net profit of 1.226 billion euros last year, for a remarkably healthy margin of 22 percent on its annual turnover. While Hermès' operating profit of 1.922 billion euros was 35% of annual sales.
Kering, by comparison, posted net profit of 1.865 billion euros, or just 12 percent of annual turnover of 15.477 billion euros; while its operating profit was 2.706 billion euros, or 17.5 % of annual turnover.
LVMH, on the other hand, posted 2017 net profit of 5.616 billion euros, meaning 13% of annual group turnover of 42.636 billion euros; while its operating profit of 8.116 billion euros represented 19 percent of annual revenues. In other words, the two large diversified luxury groups had largely similar performances in 2017 in terms of margins – both significantly below Hermès.
However, Solca’s cautious optimism did not extended to all quoted luxury brands, especially Italian.
“I don’t expect Ferragamo and Tod’s will resurrect soon.  They are still going to lag. In my view, in this market you win on the back of product innovation and they have yet to crack that nut. They are both too conservative and too based on the icons of the past. Hermès is maybe also on the back foot when it comes to innovation. They too are quite based on the icons of the past – but they are in advance for the simple reason that there is a much, much longer queue for their icons. [Previously they have] opened that tap a little more and things worked fine,” concluded Solca.

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