What to Watch: Hermès May Be a Bellwether for China’s Luxury Rebound
As the luxury market continues to navigate its post-pandemic recovery, investors are keeping a close eye on Hermès, one of the industry's top performers. Despite a 32% decline from its 52-week high, the French luxury brand remains a market leader, outpacing its rivals LVMH Moët Hennessy Louis Vuitton and Kering. However, a recent downgrade by RBC Capital Markets has raised questions about the sustainability of Hermès' exceptional growth and its exposure to the Chinese market, a crucial driver of the luxury industry's recovery.
High Expectations Weigh Down Hermès
According to RBC analyst Piral Dadhania, Hermès' growth premium, which justified its valuation premium over the sector, is converging. The analyst estimates that Hermès' revenue and EBIT growth advantage over the luxury sector will narrow to about two percentage points from 2027, down from eight points in 2025. While this still puts Hermès ahead of the pack, the narrowing gap raises concerns about the brand's ability to maintain its exceptional growth.
China's Luxury Market: A Reset in Progress
Deborah Aitken, senior luxury analyst at Bloomberg Intelligence, notes that China's luxury market has lost around 9 to 10% of its market share since 2019. However, Aitken expects the market to return to growth, with mid-single-digit growth expected in the coming years. The recovery will look different from the rebound that followed the pandemic, with a focus on pricing and value rather than volume growth.
Implications for Hermès and the Luxury Industry
As one of the biggest winners of luxury's post-pandemic "revenge spending" boom, Hermès has been heavily exposed to the Asian markets, with almost half of its sales coming from this region. The brand's growth in Asia has been particularly strong, but it now faces a more challenging environment, with a more discerning consumer and a shift towards different price points and brands. Aitken describes the current environment as "more of a sticky year, more of a difficult year in China for them."
What to Watch Next
The luxury industry's recovery is closely tied to the performance of Hermès and other luxury brands. As the market continues to navigate its post-pandemic recovery, investors will be watching closely for signs of a reset in the industry. Hermès' third-quarter results on October 22 may offer a clue as to whether the luxury industry is in a reset, and what this means for the brand's future growth prospects.
Key Takeaways
- Hermès has fallen 32% from its 52-week high, despite outpacing its rivals LVMH Moët Hennessy Louis Vuitton and Kering.
- RBC Capital Markets has downgraded Hermès, citing a narrowing gap in revenue and EBIT growth advantage over the luxury sector.
- China's luxury market has lost around 9 to 10% of its market share since 2019, but is expected to return to growth.
- Hermès has been heavily exposed to the Asian markets, with almost half of its sales coming from this region.
- The luxury industry's recovery is closely tied to the performance of Hermès and other luxury brands.