Waiting for the Luxury Shoe to Drop?

Posted by: Charles DuBow on July 22

In line with its peers at the upper end of the luxury business, Hermes (HRMS)has so far been immune to the global economic downturn. On Tuesday the 171-year-old Parisian company posted a surprise 12.8% increase to 398 million euros, or around $622.4 million, in first-half sales, thanks to strong demand for its silks, handbags and perfumes in Asia (excluding Japan) and North America. Sales were up 13% in Europe, 24% in North America and 22% in the Asia Pacific region.

But like its competition Moet-Hennessy Louis Vuitton (LVMH) and Richemont, investors don’t seem particulary pleased with Hermes’ news. Despite strong sales, LVMH’s share price is down about 12% from a high in May and Geneva-based Richemont (RIFZ), owner of Cartier, Montblanc, Alfred Dunhill and other luxury brands, saw a sharp drop in June and July before rebounding slightly. Hermes saw its shares fall back 6.96% today.

One of the reasons for investor concern is that there has been much speculation recently over a possible sale of the company. However, at the annual meeting in June the Hermes family, which controls the majority of the company’s voting shares, reiterated that it was not for sale. But the other concern, and this is what it shares with it LVMH and Richemont, is that it is impossible to know how the long good times will last.

To be sure, Hermes has done a terrific job of managing its business and brand but it remains to be seen if they will be able to continue to post such strong growth for the third and fourth quarters—and beyond. It is entirely possible that on the strength of demand from the still-wealthy and developing economies, the second half of 2008 could be as rosy as the first but because the company does not issue forecasts, investors cannot be blamed for striking a cautious tone.