Hermès eludes luxury slowdown, could overtake Louis Vuitton as top brand: Analyst

Hermès (RMS.PA) continues to resist a slowdown in the luxury industry.

And according to a recent note from Citi, the 187-year-old French luxury design house could dethrone LVMH-owned (LVMUY) Louis Vuitton as the biggest luxury brand in the world.

Hermès sales could reach 20 billion euros — a "symbolic" revenue mark that Louis Vuitton hit in 2022 — in the next three years, wrote Thomas Chauvet, head of luxury goods equity research at Citi, in an April 12 note. For the full year 2023, Hermès saw sales of 13.4 billion euros ($14.3 billion).

“We think Hermes could ultimately surpass Vuitton as the industry’s largest brand by turnover,” Chauvet added.

On Thursday, the Birkin bag maker reported that first quarter revenue rose 17% annually to 3.8 billion euros ($4.1 billion), led by leather goods sales. Hermès also saw double-digit sales growth across all regions, including 25% growth in Japan.

"All in all, a strong start to the year supported by above average +8-9% pricing, which confirms the resilience of its largest leather goods division, the high desirability for the Hermès brand and the stock's defensive appeal in a more challenging demand backdrop for the sector this year," Stifel analysts wrote in a note following the results.

First quarter earnings for LVMH, which houses other luxury names such as Dior and Tiffany & Co. in addition to its flagship Louis Vuitton brand, told a slightly different story, with a 2% decline in revenue year over year to 20.69 billion euros. While LVMH doesn't break down revenue numbers for Louis Vuitton specifically, it posted revenue of 10.4 billion euros in its fashion and leather goods division, also a 2% decline from Q1 2023.

Hermès stock is up 22% year to date, outperforming LVMH's 4% gain.

The latest earnings highlight how Hermès has largely defied a slowdown in luxury and recorded sustained growth — all while it continues to raise prices while others have started to step back from price hikes.

The industry is seeing normalization after an "unprecedented growth wave" from 2008 through the pandemic, according to former LVMH chairman Pauline Brown.

"We’re seeing that the party is coming to an end," Brown told Yahoo Finance. "It doesn’t mean it’s going to crash. There’s still a market for luxury goods and luxury fashion. It just means that ... it’s very saturated."

Brown noted that the pullback has been "most acute" in China but that there's also softness in the US, particularly from consumers starting to balk at higher prices.

“The cost of many bags by brands like Vuitton and Dior and Chanel are 50% up from five years ago, and that is not a cost of goods issue, I guarantee," she said. "It’s just that there’s been a lot of appetite for these brands, and the appetite is not cooling off. ... Where I'm seeing a pullback is more resistance to the pricing. Even ultra-affluent consumers are starting to say, 'You know what? It’s just not worth it.'"

A large part of Hermès' strength has been its handbag offerings. The standard Birkin retails at an average starting price of $10,000 and goes up from there; on the very high end, Hermès priced its Sac Bijou Birkin, released in 2012, at $2 million.

In January, Hermès again hiked prices by between 8% and 9%. That month, LVMH CFO Jean-Jacques Guiony said on an earnings call that the conglomerate isn't planning any further price increases this year.

Another luxury house, Gucci-owner Kering (KER.PA), said in February that it doesn't see "significant" price increases this year. On Tuesday, Kering CEO François-Henri Pinault said in the company's earnings release that "performance worsened considerably in the first quarter."

Citi's Chauvet pointed to several strategic advantages Hermès has, including its "affordable to ultra-luxe pricing strategy," local customer base, control over distribution channels, and expansion into new categories and geographies.

"Hermès enjoys one of the most predictable growth, margin and cashflow profiles in the luxury industry, we think," Chauvet wrote.

Click here for all of the latest retail stock news and events to better inform your investing strategy