Something is happening in the luxury goods industry. In France, Hermes (RMS) stock price has surged to a record high while Kering (KER) has plunged to its lowest level since October 2017. It has crashed by over 54% from its highest point in 2023.
The same trend is happening in the UK, where Burberry (LON: BRBY) has nosedived to 1,134p, down from a peak of 2,511p in March 2023. So, why are three companies in the same industry going in separate directions?
Hermes vs LVMH vs Kering vs Burberry
Hermes is executing wellHermes is beating Burberry and Kering severely. It is also doing better than LVMH, the biggest luxury group in the world, as I wrote here last year. While LVMH stock has dropped by over 13% in the past 12 months, Hermes has jumped by over 14%.
The main reason why Hermes is doing better than LVMH is that it is a simpler organisation while LVMH has over 75 companies. In most cases, conglomerates usually trade at a deep discount than simpler organisations.
The other reason why Hermes is beating Kering and Burberry is that it is executing well, which explains why its revenue and profits are growing.
As part of Hermes execution, the company focuses on the upper echelon of the luxury industry. As such, it tends to generate higher margins than these other companies.
Most importantly, it has a tighter control of its supply chain, which ensures that its products retain their value for longer. For example, it is not uncommon for Hermes to engineer product shortages for its key products, which ensures that their prices remain elevated.
At the same time, Hermes rarely gives discounts, another reason why its products are always in demand. Kering and Burberry have been accused of offering discounts and selling lower-cost products, which has made them lose the appeal among most luxury shoppers.
Hermes is also known for building anticipation of its products and avoiding celebrity endorsements and marketing. It is not uncommon for the company to have long wait times for some of its exclusive Birkin bags
While celebrities can help to supercharge a company’s revenue, they can also affect their brand appeal in the long term.
Hermes has also focused on having better margins. Data shows that its gross margins stand at about 72% while the net income margin is about 32%. LVMH, because of its conglomerate nature, has a gross margin of 68% and a net margin of 17%. Burberry and Kering have net profit margins of 14% and 15%, respectively.
The results are there to showThe Hermes approach has led to spectacular results, especially in China, the fastest-growing market in the industry. On Thursday, Hermes said that its sales jumped by 17% in the first quarter to 3.8 billion euros.
Its Asia Pacific revenue rose by 14% to 1.9 billion euros while China saw a slight drop in sales.
These results are a sharp contrast to what Kering reported this week. The company said that its sales were dropping at a fast pace. It said that its revenue would drop by between 40% and 45% in the first half of the year.
These are huge numbers for a company whose turnaround is taking longer than expected. Most importantly, they are worrisome for a firm that recently spent 1.3 billion euros on a building in Milan. The same trend is happening at Burberry, which has delivered several profit warnings in the past few months.
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