Robert Way
investment action
Based on my current outlook and analysis on Hermes International (OTCPK:HESAY) (RMS), I recommend a Buy rating.I expect Q1 2024 and fiscal 2024 to be strong as high-end consumer demand remains very strong, strong enough to RMS can drive another round of 8% to 9% pricing growth (an improvement from the mid-single-digit price increase shown in the Q3 2023 earnings call). Notably, demand momentum is emerging across all regions, particularly in China where spending has slowed significantly relative to Gucci’s share growth in China.
Basic information
RMS is a well-known luxury brand with products ranging from accessories to clothing, serving a global clientele: 56% from Asia, 23% from Europe, 18.6% from the Americas and the remainder from other parts of the world. RMS competes with other giants in luxury retail such as LVMH, Kering, Prada and private companies Owns the Chanel brand. RMS is expected to report first-quarter 2024 results on April 25, about two weeks from now.
review
My high-level view is that RMS will continue to see very strong sales momentum in the first quarter of 2024, based on Profitable Q4 23 This shows strong growth prospects.First, consumption willingness and The spending power of high-end consumers is very strong, and RMS has achieved double-digit growth in all major product categories. In particular, RMS’ largest segment, leather goods and saddlery, grew 10.4% on a constant currency basis in Q4 2023, with management highlighting strong demand for high-end products. In addition, the growth rate of leather products was 17%, which was at the high end of management’s earlier double-digit growth guidance for fiscal 2023. Demand for ready-to-wear (RTW) and accessories was also strong, growing by 27.5%; other segments grew by 24%; silk grew by 13%, all at constant exchange rates.
Of course, I was concerned about whether sales would be driven by specific regions or spread across the country, and RMS did not disappoint. In fact, all regions posted double-digit growth in fiscal 2023, meaning China also performed well.I point to the performance in China because Kering announced that Gucci sales will be down 20% due to economic slowdown in Asia. If we reverse this news, it means RMS gained a strong relative share of at least 30% (Gucci down 20% + RMS’ “double-digit growth” in Asia). In 1Q24, I expect China to remain the focus of RMS regional results as investors look for further signs that RMS is continuing its share growth. My view on this is that RMS will continue to perform well in China, as management did not mention any slowdown during the fiscal 2023 earnings call on February 9. From this, we know that 1/3 of the season will still see strong demand. February is the Chinese New Year, which is a big event, and I expect seasonal demand to be strong due to gift-giving and other reasons. Therefore, strong growth should continue in 2/3 of 1Q24. This sets up a pretty positive outlook for the first quarter of ’24.
Additionally, strong performance across all regions reinforces the fact that RMS is a very resilient business and inflation has not materially slowed the business’ growth.Instead, I think inflation actually beneficial to RMS because they now have more They have reason to raise prices, and they did so in fiscal 2024, and more significantly. For fiscal 2024, management announced price increases of 8% to 9%, primarily to combat inflation and currency headwinds, which is higher than mid-single-digit levels in 3Q23. There are two key takeaways here. First, it does show that RMS has the pricing power to keep raising prices, and second, it shows that management is confident that this won’t impact sales demand, which again goes back to my point that RMS is a resilient business because there’s a whole bunch of Its customers tend to be highly loyal and high-net-worth clients.
Valuation
author’s works
I believe RMS will grow at a lower percentage in the coming years. Historically, growth has been in the high single digits, but I think lows are likely in the near term as prices continue to grow strongly (continuing current trends in FY24 and FY25 as inflation slowly declines) and recovery Digital growth As the global economy recovers, consumer demand will also increase (which I believe is the near-term recovery growth). RMS is unlikely to lower prices (given this is a luxury brand), so any cost reductions should increase profits. That said, given that pricing growth should gradually slow, I don’t expect margins to expand at the same rate. In my model, I don’t expect the increment to be more than half that, which is conservative. I expect RMS to post sales of €18.3 billion and profits of €6.55 billion in fiscal 2026. As sales growth gradually slows, valuations should gradually return to the 5-year average forward price-to-earnings ratio of 45x (excluding the COVID-19 period, which was an abnormal period).
risk
My view on China is positive based on the data points given, which are backward looking, and given the state of consumer spending in China, RMS may experience the same slowdown as Gucci. If this happens, it will hurt near-term growth prospects, as Asia is an important part of RMS’s business. It would also undermine my optimistic view that RMS is a very resilient business (even during the subprime period, the business grew in the high single digits).
final thoughts
My recommendation is a buy rating. I expect RMS to deliver strong results in the first quarter of 2024 and fiscal 2024, driven by continued growth in high-end consumer demand and its ability to effectively raise prices. Strong sales momentum in all regions, particularly in China, where RMS outperformed competitors in market share, bolstered the company’s resilience. While China’s economic slowdown remains a risk, demand conditions so far have been very positive. Going forward, I’m modeling RMS to see low double-digit growth and margin expansion in the near term.
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