In this company overview we will analyse the French company Hermès which has been operating in the luxury clothing industry since 1972.
Our objectives are to understand the geographical part of the world which is driving Hermès sales the most, to understand how the brand had sustained itself during the pandemic, the near-future outlook of the company, the efficiency of its financial management and if the firm is a good candidate for a long term investor.
🌏 In 2020 58% of Hermès sales have been from Asia. Even though the pandemic has impacted in-store sales due to the forced worldwide closure of their shops in March 2020, the online shop had a huge increase as the overall sales of the firm in Asia increased Year-over-Year by +8.6%.
🌍 European sales have declined by -24% Year-over-Year in 2020.
🌎 Then, the American market has not shown any resilience as sales decreased by -21% Year-over-Year in 2020
🗺 With the three markets combined, Hermès has seen its worldwide sales declined by -7% Year-over-Year in 2020 (Currency exchange taken in consideration).
For the past few years, the operating margin of the company has had an overall positive trend, starting at 31% from 2011 and finishing at 34% in 2019 (pre-COVID) with a peak of 35.6% in 2018.
For comparison, Kering (owner of brands such as Gucci, Balenciaga or Alexander McQueen) had a minimum of 14.22%, a maximum of 30.08% during the past 10 years and from their last report they had an operating margin of 23.93%.
Hermès has increased its operating margin in the Asian market by appealing to their Asian wealthy customers by increasing the selling price of their products.
In 2019, the operating margin of the company was at 34% but in 2020 while adapting to the global situation, Hermès has managed to maintain an operating margin at 32%.
The Asian market is the catalyst in maintaining the high worldwide operating margin as Hermès in Asia has an operating margin of around 40%, which is really substantial when combined with the fact that 58% of Hermes sales are done in Asia. An increase of sales might have been possible if Hermès reduced their margin but the brand may have had lost their luxury image.
The fact that Hermès has managed to raise its price by 1% and increase their operational margin in this geographical part of the world where strong players such as LVMH or Kering are also operating shows that Hermès is a leader in the luxury clothing industry.
During the last quarter of 2020, Hermès sales started to recover as shops re-opened in Asia, Europe and America. The demand for Hermès products has not vanished however some customers have evidently preferred to wait for the full in-store experience rather than shopping online which has been proven with sales numbers increasing by 12% for the last quarter of 2020 compared to the last quarter of 2019.
Sales Outlook for 2021:
With the roll out of the vaccines in Europe, America, and Asia, the world is entering an economic recovery in every sector.
The outlook of Hermès sales in the Asian market is exciting as the firm is predicting an increase of revenues between 15% - 20% for 2021 by increasing their operating margin up to 45%. Hermès strategy might be to increase their price by 5% to cancel out the near-future inflation due to the global recovery.
As we have seen recently that the Asian market has been key to Hermès sales in 2020 and we can expect the Asian sales to be able to cancel out any decline of sales in the European or American markets.
The analysts predict that for 2021, Hermès global sales will increase to around 15% of revenues with an operating margin of 33.8%. And for 2022 to increase by 12% year-over-year with an operating margin of 35% assuming a full worldwide recovery of the pandemic and also assuming a complete roll out of the vaccines.
Other than the cost of sales, admin expenses and salaries, Hermès is only paying 6% of its revenues on capital expenditure. These capital expenditures are also being used to upgrade their supply chain in order to increase their net operating margin over the long term.
Also, Hermès has been spending about 3% yearly in marketing and advertisement from its free cash flow for the past 15 years.
The amount of sales in relation to the small amount of yearly spending in marketing is very interesting and it shows that the brand has built an image and a reputation mainly around word-of-mouth and flagship stores.
During the past 10 years the amount of accumulated dividends paid to shareholders has been about 30% of the total free cash flow. Also, around 4.7% of the total free cash flow has been spent in share buybacks for the past 10 years. Those two signs show a healthy financial management with a positive signalling effect which is very reassuring for investors.
At the moment, with a share price at around 990€, the dividend yield is around 0.50% and a price-to-earnings ratio is about 74 comparing to its peers who are at 23.52.
Hermès is a well established worldwide brand within the luxury clothing industry which has high barriers of entry.
Its financial management has adopted a very good strategy for the past few years which was to reduce the spending on marketing and to pay its shareholders through dividends and share buybacks.
The Asian market has been key to the firm's survival during the pandemic.
Excluding the future operating cash inflows of the company for the next years, the price-to-earnings ratio is high and the dividend yield is low to make it attractive to investors even though the company has a strong balance sheet. 2021 and 2022 will be very important and decisive to the company because if there is a strong economic recovery, sales growth should come back and it would reduce the price-to-earnings ratio.
From a long-term investor point of view, Hermès is a really good candidate when including future cash flows as the company has always increased its investors' wealth.