Hermès has been one of the main players in the world of luxury for nearly 200 years. They're not the biggest. They're certainly not the best known. But when it comes to building a brand that is desirable, that is exclusive, that is very expensive, but that is known among the elite as the status brand. Hermès stands by itself. The brand offers a variety of products, but its handbags are the most coveted of all. Celebrities, leaders, and even royals have to earn the chance to buy a Birkin or Kelly bag, which analysts say accounts for a quarter of Hermès' total revenue. And they can fetch a hefty $100,000 or more on the resale market. When we look at brands, the most important metric to judge is desirability. Surprise, surprise, once again, Hermès has been at the top of the list.

It's the world's fourth biggest luxury fashion brand by revenue, and by close on October 24th, its stock had soared to more than $22,000 a share, lifting its market cap to more than $233 billion. Despite a global luxury slowdown, Hermès is seeing impressive sales and growth, all while maintaining its centuries-old strategy that places scarcity at the forefront, fueling fierce demand. They've managed this balance where, as a publicly traded company, they have strong sales growth, they have strong margins, but they also maintain that exclusivity. And that sense that Hermès is a special thing to have because they have these different tiers of products, and that's where they have mastered the art of the luxury game. Hermès was founded in Paris in 1837 by Thierry Hermès, who initially made high-quality harnesses and

saddles for European royalty. The brand later moved to the Rue du Faubourg Saint-Honoré, where it has remained since 1880. Its renowned products have legendary histories as well, from the Kelly named after Princess Grace Kelly of Monaco or the Birkin because of a chance encounter with actress Jane Birkin. Hermès was even the first to bring back the zipper from the US. They spent a lot of time making the highest quality leathers, stitching, et cetera, but also paying close attention to the lifestyle of their customers. And that is where Hermès is just unparalleled. That combination of history, craftsmanship, and awareness of what their customers, their wealthy customers, truly want. The company doesn't partner with brand ambassadors and spends considerably less on advertising than its competitors when it comes to its most notable products. Even the elite must have an in,

cultivating a relationship with a sales associate and making several purchases just to be considered for a Kelly or Birkin. There's only a limited amount released per year with a quota attached to certain styles. A client can only purchase two Birkin and Kelly purses per year, for example, when. You're holding a Birkin bag, especially if it's a special limited edition. It's not just that you bought the bag, but people know that to get that bag, you've spent 5-10 times that. Hermès is a vertically integrated company that's still run by the founding family. Interviews are rare. It declined CNBC's request for one. They always want to be building or making less than there is demand for. So that's fewer stores, fewer handbags, fewer online sales than the market would otherwise purchase by making less than the market demands. They can smooth over and ride these cycles of ups and

downs. They are very keen to stick to what works and to their way of doing things. Think about, for example, the streetwear revolution that has got the industry by storm. There were very little moved by it. Now that it has been significantly abating, I guess that they have been right to stay true to their DNA. While Hermès' store count is much smaller than its competitors, its revenue is substantially higher. You could say that Hermès fights way above their weight when it comes to profit margins and growth, and certainly status. They are top of the industry, which is why Bernard Arnault made such a run for the company. The run Frank is referring to is the four-year legal battle between Hermès and LVMH CEO Bernard Arnault, after he built a more than 20% stake in the company, becoming its largest stakeholder.

Today, LVMH holds no ownership, though the Arnault family owns just under 2%. A good measure for how much faith investors have in a company's future growth is its price-to-earnings ratio. Hermès is more than double that of several rivals. In 2020's third quarter, Hermès saw double-digit revenue growth, while competitors like LVMH and Gucci owner Kering reported sharper-than-expected declines in sales. The company's share price has risen almost 10% since the start of 2024, while LVMH and Kering declined 13% and 40%, respectively. The luxury industry is going through a huge correction right now. You've had the aspirational consumer. Those are the people that aren't really wealthy, but just like to splurge once in a while on a great handbag, pair of shoes, whatever. Those customers have not disappeared but certainly

faded away. Hermès hasn't been completely immune. In its Q3 2024, it did see lower sales growth in all regions compared with the same quarter of the prior year. The company noted in an earnings call that it was still facing lower traffic, but that customers were spending more money per transaction. The luxury goods industry could be in for a prolonged period of weakness. We've already seen it for a couple of semesters. Hermès is still growing at double-digit rates. You could see some slowing, though over the next year or so, depending on what happens in China, North America, and in Europe since 2019. Luxury prices have increased by more than 30%. The cost of Hermès' most popular model is now 16% higher. In the past few years. Their price increases have been more muted relative to their competitors. Chanel, take your take on this year.

They have by far the most important contribution from pricing to the tune of 8%, which is definitely very handy in a year when the industry is confronted with a global cyclical slowdown. Keeping its products timeless is core to Hermès' identity, and yet they haven't really launched anything massively innovative. Aside from new materials, new looks to sort of traditional products. And yes, those things are timeless and classic. And that's the look and the brand that they like to be. But at some point, those timeless products may have seen their time. They could establish more iconic products outside of leather goods. I'm thinking of watches, for example, and drive the revenue growth without any risk that there's cross-subsidization from one category to the other. And there's always the risk that counterfeits pose, both from a reputational perspective as well as

legal. Fakes are a $4.5 trillion industry, and Hermès has spent millions in legal fees trying to fight them. Though the company's margins haven't been as affected by a decrease in spending by aspirational buyers, higher prices and long wait lists could push away even the most loyal. Falling share prices across the sector could be a sign of what's to come. Hermès also faces sustainability and ethical concerns tied to its use of wild animal skins. Climate change could impact its supply chain for materials like Brazilian silk or European leather, and finally, exclusivity. While some deem that to be precisely the reason why the company has been so successful, it could also backfire. A class action lawsuit filed in March 2024, in California, accused the company of forcing its customers to spend thousands before being able to buy a Birkin, alleging this violates antitrust law.

Plaintiffs revised their suit with more details on October 14th, 2024, after the judge requested more proof for the case to proceed. Imagine any other business where you walk into a store and you say, Here's $12,000, I want to buy a bag. And they say, No, and you say, Okay, I'm going to spend hundreds of thousands of dollars on scarves, on belts, on other bags, and then I'll be eligible to buy that. So it's not just, No, you can't have it, but You're going to have to spend ten times that just to be eligible to buy it. I mean, it's a devious business model. It sounds insane to most people, but it is one of the keys to their success.

Why Hermès Is Growing While LVMH And Gucci Decline

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Why Hermès Is Growing While LVMH And Gucci Decline

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