Hermes for the Holidays?
As we approach the more frantic stage of holiday shopping, some with fatter wallets than ours will be buying Hermes. Scarves, that is, Birkin bags, small bottles of perfume. All of which carry significant profit margins for their maker.

Hermes appears to have an ability to monetize a very powerful long-term growth trend: the rising number of wealthy people in the world. Forbes reported that there are 2,208 billionaires in the world this year, 8% more than the year before. There are tens of millions of millionaires in the world now and their ranks are swelling nearly as fast.1

Many of these newly affluent people wish to signal their success, and what better way than with a readily recognizable, very expensive, tie, scarf, bag or bangle? The number of luxury market consumers is growing by roughly 4% to 5% each year. This growth rate is expected to continue until at least 2025 when an estimated 450 million people will be buying luxury goods.2 We believe Hermes is one of the companies squarely placed in the center of this opportunity.

Cachet Is More Important than Volume Growth

Hermes’ best known products are easily recognizable. This benefits their clients, who want to use them to signal success. It also benefits Hermes, protecting it from taking on fashion risk every year, and strengthening its pricing power. Luxury is an industry for which growth can be deadly if it is not handled carefully. Increasing volume erodes the cachet of the product, which is, after all, supposed to be something only a few can afford. Hermes solves this problem by raising prices regularly  ̶  for instance, the entry price of a Birkin bag went from €2,600 in 2007 to €5,800 in 2017 – and by limiting supply. The current wait list for a Birkin bag is two years long.3 In our opinion, this pricing power is not in danger of collapsing any time soon. There is a secondary market for Hermes bags, where they can fetch higher prices than new products, indicating the longevity of their appeal.

This longevity is another key to the brand strength Hermes can wield. Since its founding nearly 200 years ago, Hermes has continually positioned itself as a provider of luxury leather goods to the world’s elite. It has been providing its silk twill headscarves to them for over eight decades. What other company can show press photos of Grace Kelly hiding the early signs of her first pregnancy by covering her tummy with their handbag? (That’s how the Kelly bag got its name, by the way.) None. What other company can show Jacqueline Kennedy wearing one of their instantly recognizable scarves in Capri? None. Very few brands in the world have this provenance. It takes decades, even centuries, to develop.

For each of the past seven years, Hermes has returned more than 25% on the capital invested in it.4 For the decade prior to that, Hermes produced annual capital returns ranging from the high teens to the low twenties.5 Whether this performance will persist remains to be seen. Furthermore, a good company is not always a good stock for investment: Hermes shares are usually as expensive as its products. However we believe that Hermes holds an enviable and very stable place in the mindshare of the world’s wealthiest consumers. In our opinion, it can maintain this market position and resultant pricing power for some time.

As of 9/30/18, Hermes was 1.59% of Oppenheimer International Growth Fund’s portfolio.

 
  1. ^Source: Credit Suisse Wealth Report 2017
  2. ^Source: Bain & Company’s Altagamma 2017 Worldwide Luxury Market Monitor.
  3. ^Source: Morgan Stanley research, as of August 2018
  4. ^Source: Bloomberg, as of December 14, 2018
  5. ^Source: Bloomberg, as of December 14, 2018