Future Investments May Squeeze Margins But Could Strengthen Global Expansion

Key Takeaways

• Operational investments to expand production capacity and secure supply chains may strain net margins and cash flow short-term.
  
• Geographic and digital expansion efforts increase revenue growth potential but pose risks from high costs and potential overextension.
  
• Strategic investments in capacity and diverse product launches drive Hermès' strong market presence, growth, and resilience despite macroeconomic challenges.

Catalysts

Engages in the production, wholesale, and retail of various goods.

• Hermès has significantly ramped up its operational investments, spending €2.5 billion over three years to expand production capacity and secure supply chains. While this shows commitment to growth, the substantial upfront costs may impact net margins and cash flow in the near term.
  
• Expansion in new geographic areas, such as the U.S. and Asia, including new store openings and renovations, aims to drive revenue growth. However, this expansion may lead to increased overhead costs and the risk of overextension if market dynamics or demand shifts.
  
• The company plans to enhance its digital and omnichannel distribution networks, requiring continued investment in logistics and information systems, potentially impacting operational efficiency and net margins until these become fully integrated.
  
• Hermès is taking a cautious approach towards production amid geopolitical and trade tensions, particularly in the U.S. While they emphasize a French production base, potential trade disruptions could impose additional tariffs or costs, possibly compressing profitability.
  
• Despite robust revenue growth of €15.2 billion in 2024, Hermès anticipates challenges, such as fluctuating foreign exchange rates, especially the yen and yuan against the euro, affecting gross margins and earnings. This emphasizes the importance of navigating currency volatility in future projections.

Hermès International Société en commandite par actions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hermès International Société en commandite par actions's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 28.8% in 3 years time.
• Analysts expect earnings to reach €6.1 billion (and earnings per share of €57.88) by about February 2028, up from €4.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.7x on those 2028 earnings, down from 64.6x today. This future PE is greater than the current PE for the GB Luxury industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Hermès International Société en commandite par actions Future Earnings Per Share Growth

Risks

• Hermès has successfully pursued strategic investments in production capacity and its global network, maintaining agility and commitment despite unpredictable economic and geopolitical contexts, which can lead to long-term revenue growth and operational efficiency.
  
• With a diverse portfolio of successful product launches across leather goods, ready-to-wear, fragrances, and other divisions, the company shows strong market desirability that can positively influence its revenue and earnings.
  
• The company has a solid financial structure with significant cash reserves, allowing it to invest in the future and maintain independence, which supports its ability to sustain and potentially increase net margins.
  
• Despite the macroeconomic challenges, Hermès saw robust revenue growth across all regions, notably in America and Japan, driven by loyal local customer bases, which can lead to sustained revenue contributions from diverse geographical markets.
  
• Hermès continues to enhance its production and supply chain capabilities and maintains strong relationships with partners, which can help keep costs steady and protect high net margins amidst external pressures.

Valuation

• The analysts have a consensus price target of €2449.864 for Hermès International Société en commandite par actions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €3000.0, and the most bearish reporting a price target of just €1480.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €21.1 billion, earnings will come to €6.1 billion, and it would be trading on a PE ratio of 51.7x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €2839.0, the analyst price target of €2449.86 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.