Equity Insights
By Motheo Tlhagale and Chantal Marx
Hermes was founded in 1837 by Thierry Hermes as a Parisian harness workshop, quickly gaining acclaim for its craftsmanship, particularly its signature saddle stitch. Under the guidance of his descendants, notably his grandson Emile-Maurice Hermes, the company evolved from saddlery to luxury goods. Recognising the rise of the automobile as both a challenge (to the harness business) and opportunity, Emile-Maurice expanded the product set into leather goods, luggage, and accessories. He also introduced the zip to France and adopted the now-iconic horse-drawn carriage logo
By the 1920s, Hermes had diversified into ready-to-wear fashion, scarves, ties, and perfumes - always maintaining a commitment to artisanal quality. During the 1930s, Hermes introduced some of its most recognised original goods including the "Sac a depeches" (renamed the "Kelly bag" after Grace Kelly in the mid-1950's), and the Hermes carrés (square scarves).
Later generations modernised and globalised the brand. Robert Dumas (son-in-law of Emile Maurice) introduced key product lines and navigated the synthetic-heavy 1970s without compromising standards. Robert's son, Jean-Louis Dumas, led the international expansion, invested in complementary luxury houses, and attracted a younger clientele. Another famous Hermes handbag, the "Birkin bag" (named after British Actress Jane Birkin who co-designed the bag) was launched 1984. In 1993, Hermes went public while remaining under family control, enabling strategic investments in names like Jean-Paul Gaultier and Leica.
Today, Hermes International is not just a luxury brand but a cultural institution, revered for its craftsmanship, discretion, and exclusivity. Hermes designs, produces, and retails an extensive range across sixteen métiers, including Leather Goods & Saddlery, Ready-to-Wear & Accessories, Silk & Textiles, Perfumes & Beauty, Watches, Jewellery, and Home collections. Over nearly two centuries, the Maison has transformed into a global enterprise while preserving the artisanal spirit of its origins.
Its enduring success stems from a long-term strategy focused on preserving savoir-faire, sourcing exceptional materials, and maintaining its heritage of quality handcraftsmanship by investing heavily in the training and development of its artisans. The company strictly controls the number of products it produces as most of its products are hand-crafted (naturally limiting available supply) and also to preserve exclusivity. This approach fosters deep brand loyalty, ensures pricing power, and protects Hermes from market volatility and fleeting trends.
More than a luxury house, Hermes is a curator of lasting value. Iconic creations like the Birkin and Kelly bags, crafted by hand in limited numbers, embody its philosophy of creating "objects for life." Through their rarity and craftsmanship, Hermes pieces transcend fashion to become enduring symbols of elegance and heritage.
Hermes has 'Veblen' good qualities
A Veblen good is a good for which demand increases as the price increases. This contradicts the "normal" relationship between price and demand. This phenomenon was first explained by Thorstein Veblen in 1899 in his book The Theory of the Leisure Class.
These good are usually high-quality, coveted products that the majority of the population will not or cannot purchase. Veblen goods are generally sought after by affluent consumers who place a premium on the utility of the good - the good makes the consumer feel more exclusive and important, since they are purchasing something of high quality that is out of reach for others.
The companies producing Veblen goods typically have a very strong brand identity that is synonymous with luxury.
Perhaps cementing Hermes status as a luxury and Veblen good is its success in the second-hand market - particularly when it comes to the Birkin and Kelly Bags that tend to appreciate in price over time. This is in stark contrast to other vehicles that typically lose value as soon as they leave the store.
The indelible strategic pillars of Hermes
Hermes' strategy is centred on six key pillars:
Most Hermes products are handcrafted by highly skilled artisans.
An artisan spends 15 to 20 hours creating a single Kelly bag, with each bag made entirely by one craftsperson. To ensure the highest quality product, Hermes invests heavily in training through its internal school, the école Hermes des savoir-faire. The company also exercises stringent control over its raw material supply chain. It sources the finest leathers, silks, cashmere, and other precious materials from around the world, often through long-standing relationships with suppliers or by vertically integrating, such as owning tanneries (e.g., Tanneries du Puy)
Hermes maintains an almost unparalleled level of control over how its products reach the customer.
Its primary sales channel is its global network of over 300 company-operated stores where design, atmosphere, and service standards are curated to provide an immersive and exclusive brand experience. This direct control allows Hermes to manage inventory effectively, maintain price integrity, and cultivate direct relationships with its clientele. While Hermes has embraced e-commerce, its approach is highly selective and curated, mirroring the exclusivity of its physical stores. Wholesale distribution is minimal and highly selective.
Hermes focuses on creating objects of enduring design and quality that transcend fleeting fashion trends.
Products like the Birkin bag, the Kelly bag, the Constance bag, silk "carré" scarves, the "Chaîne d'Ancre" jewellery motif, and the "Cape Cod" and "Heure H" watches are cultural icons, desired across generations. While creative directors for each métier introduce new collections seasonally, these often subtly reinterpret or build upon the brand's established design codes rather than pursuing radical departures. Hermes products are designed to last or be repaired at one of the company's specialist repair workshops.
Production is aligned with artisanal capacity and supply is also strategically managed to maintain exclusivity and desirability.
Controlled scarcity fuels intense aspiration and desire among consumers, reinforcing the brand's status and justifying its premium pricing.
Hermes boasts a balanced global footprint with targeted regional strategies.
Its biggest market is the Asia Pacific region (being mainly China and Japan within the region), followed by Europe and the Americas (mainly the United States).
Family stewardship
ensures a focus on long-term value creation, brand integrity, and the preservation of Hermes' unique culture and artisanal heritage, often prioritising this over short-term financial gain. Hermes has fiercely guarded its independence and resisted takeover attempts to maintain a distinct identity within a luxury sector increasingly dominated by large conglomerates.
Growth Drivers: Catalysts for Continued Ascendancy
Hermes's growth trajectory is fuelled by a multifaceted strategy that leverages the strength of its core businesses while strategically expanding into new and adjacent product categories, all supported by favourable global demographic trends and targeted market development.
Dominance and measured expansion in leather goods and saddlery:
To meet this carefully managed demand, Hermes continually invests in opening new, and expanding existing, leather workshops (maroquineries) across France. Continued investment in vertical integration, including ownership of tanneries, allows for unparalleled product control.
Dynamic growth in ready-to-wear (RTW) and accessories:
Hermes RTW eschews overt logos and fleeting trends, focusing on luxurious materials, impeccable tailoring, and an understated, sophisticated elegance that appeals to its discerning clientele (and current "quiet luxury" fashion trends).
The enduring appeal of silk and textiles:
Hermes is also famed for its iconic silk "carré" scarves, first introduced in 1937. Each scarf design is a work of art, often involving intricate illustrations and a complex screen-printing process with numerous colour screens. Hermes collaborates with artists worldwide for its designs. Beyond scarves, the range includes shawls, stoles, ties, twillys, and innovative textile products like cashmere/silk blends. Textile items also serve as an initial entry point into the Hermes universe for new customers.
Perfume and beauty as a strategic new frontier for growth:
Hermes strategically entered the beauty market in 2020. The products are characterised by high-quality formulations, luxurious refillable packaging designed by Pierre Hardy (creative director of Hermes jewellery and shoes), and a distinct olfactory signature. Hermes Beauty is sold through its own boutiques, online, and a selective network of high-end department stores. Future expansion into skincare is a logical and anticipated step. The existing portfolio of established fragrances (e.g., Terre d'Hermes, Twilly d'Hermes, Eau des Merveilles, Caleche) continues to perform well. Fragrance is still a high-growth area in the broader personal care universe.
La Montre Hermes (Watches) and jewellery is gaining momentum:
The watchmaker is based in Switzerland and has invested significantly in developing its watchmaking expertise, including acquiring movement manufacturers (e.g., Vaucher Manufacture Fleurier, in which Hermes has a stake). Hermes jewellery, under Pierre Hardy, focuses on strong, often equestrian inspired, design codes in silver, gold, and high jewellery collections.
Other Métiers (Art de Vivre - Home, Tableware) enhance the Hermes Universe:
While individually smaller, these categories, including furniture, lighting, home textiles, wallpaper, and tableware (porcelain, crystal), collectively contribute to the holistic Hermes lifestyle offering.
A profile of sustained financial excellence
Hermes has consistently delivered strong financial results, showcasing growth and resilience. Over the past decade, the company has typically reported annual organic sales growth in the high-single digits to low-double digits, significantly outpacing the broader luxury market. This growth has been broad-based, stemming from positive contributions across its diverse product categories and geographic regions.
Profitability has also been a standout feature. Gross profit margins are exceptionally high (ten-year average: 69.4%), reflecting the significant value-add from its artisanal production and strong pricing power. Operating profit margins have consistently been among the highest in the luxury sector, frequently exceeding 40% (ten-year average: 35.9%).
This robust profitability is underpinned by a disciplined and efficient cost structure. The largest share of operating expenses falls under "Sales and administrative expenses" (€3.6 billion in 2024), primarily driven by personnel costs tied to its extensive global sales force and support staff. Variable rents for prime retail locations also contribute significantly
Strategic investment in brand prestige is evident in communication expenses, which totalled €637 million. These outlays are crucial to reinforcing the company's image and global visibility
Another key component, "Other income and expenses" (€942 million), is dominated by depreciation and amortization (€693 million), reflecting ongoing investment in both owned production facilities and leased retail spaces ("right-of-use" assets). This category also includes costs related to employee share plans, highlighting the company's commitment to sharing success with the craftspeople at the heart of its identity
The company has demonstrated an outstanding ability to generate substantial economic value over the past decade. Its Return on Invested Capital (ROIC) has consistently and significantly exceeded its Weighted Average Cost of Capital (WACC) every year. This consistently wide positive spread reflects a highly profitable business with a strong competitive advantage.
Despite a sharp rise in the cost of capital since 2021, the company's returns have remained robust, highlighting its operational efficiency and pricing power. This sustained ability to deliver returns well above the cost of capital is a testament to superior management and underscores a compelling value proposition for investors.
Hermes' balance sheet is a testament to its financial prudence. The company typically operates from a net cash position, providing substantial financial flexibility to fund its organic growth initiatives, make strategic (though rare) acquisitions, investing in sustainability, and returning capital to shareholders through consistent and growing dividends. Capital expenditure is primarily directed towards expanding and renovating its retail store network to reflect the brand's standards and increasing its production capacity to meet carefully managed demand.
Investment case summary
Risks
Consensus considerations
Analysts maintain a consistently favourable outlook on the stock, 55% of analysts hold a "BUY" recommendation on the stock, 35% have "HOLD" ratings on the name and 10% suggest selling the share. The consensus target price is currently €2 582, 13.8% above the current share price.
Valuation
When looking at Hermes' valuation multiples relative to most industry peers, the company trades at a substantial premium which has, in the past, put investors off in terms of investing in the counter.
Companies that produce and sell Veblen goods are, however, unique and should probably not be valued in a similar way to those delivering normal goods. Examples of these being Hermes, Ferrari and Brunello Cucinelli. Veblen goods are very defensive in terms of demand and typically are not impacted by broader economic cycles. Additionally, the scarcity of product and the companies' ability to raise prices and control production means that the playing field is not level and therefore the multiples attached to the companies will not be close to the rest of their respective industries. High multiples, in our view, are justified and further complimented by relative certainty of demand and excellent financial visibility.
A better way to look at the companies are perhaps to look at its valuation multiples relative to itself, in which case Hermes is regarded as offering fair value currently.
