Hermes would impress Wilde's Lady Bracknell
Published 11/05/2015 | 02:30
If Oscar Wilde's immortal Lady Bracknell was still around and she was to swan into town to purchase some accessories, she would have every reason to repeat her most famous line, 'A HANDBAG!'
Firstly, because downtown department stores seem to be devoting an increasingly large acreage of selling space to these stylish accessories, but even more extraordinarily, their prices have gone through the stratosphere.
I would not normally inquire about handbag prices, but entirely for research purchases I did, and the kindly Dublin sales assistant informed me that a 'nice' bag could cost as much as €30,000! I didn't wait to find out what the matching scarf would cost.
The French company under our microscope today, Hermes, can take a significant credit or blame for this triumph of conspicuous consumption spending.
It is certainly creaming vast profits from the vanity of the rich. Hermes is valued on the stock market at €35bn and someone has calculated it sells one of its pricey scarves every 20 seconds.
It is, of course, far from expensive handbags that Hermes has its origin. It started out in 1837 as a saddles and harness business and is still controlled by the founding family who own a majority of the stock.
It didn't get into the fashion business proper until the 1920s. By the 1950s, it expanded into belts, riding gloves, travel trunks, and in 1956 the 'Kelly Bag' made its debut (called after Grace Kelly). In 1993, Hermes went public.
It has 11,000 employees worldwide, 60pc in France, and over 300 outlets from Basel to Buenos Aires. It also sells perfumes, watches and tablewear. In Asia, where gift-giving is especially valued, Hermes has its largest market, accounting for almost half of group sales. Europe contributes over one-third, France is the main driver, with half of those.
Hermes's leather business is its largest. In addition to is famous Kelly handbag, it also has the Birkin bags, named in honour of the French-based British actress Jane Birkin.
It is hard to understate the importance of the leather business to Hermes; it accounts for 44pc of total sales and if a customer wants one of the iconic bags, he/she will have to wait for it, a market tactic that must be handled adroitly. Hermes's second significant business is its designer women's/men's fashion and it also includes, hats, belts and shoes and accounts for a quarter of group sales. The company sells an impressive €500m worth of its expensive scarves worldwide each year.
Over the last four years, Hermes has been involved in a bitter row with Bernard Arnault, the richest man in France. Arnault's company, LVMH, owner of luxury brands like Louis Vuitton, Moet, Bulgari and Fendi, amassed a 23pc stake in Hermes. The controlling family saw Arnault as a predator. As a result, they put 51pc of their shares into a trust for 20 years, so blocking any takeover bid.
Last September, a deal was concluded where Arnault reduced his holding to 8.5pc and walked away with a handsome profit.
Hermes reported revenue of €4.1bn last year up 10pc.
This is more than 2.5 times its sales of 2005. Operating profits at €1.3bn were up 7pc; quadruple its profits in the same 10-year period. During this time, Hermes shares moved from €50 to €340. Today, its share price is €328 and its P/E is a crazy 38, with a market cap of €35bn.
Operating margins last year were 31pc, well ahead of its competitors, and investors were cheered up with the €5-a-share special dividend. Growth expectation for 2015 is 8pc but some analysts expect double figures.
Hermes is unique and its branding is understated, it does not follow trends and it rates craftsmanship highly. This contrasts with some luxury goods bedecked with their own logos.
For investors, Hermes is a quality share, it majors in the most profitable luxury goods category, ie. leather, has high margins and its products are highly desirable. The company trades at a premium to the sector and its shares are close to a 10-year high. For the moment I would pass.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.