Portfolio Holding Focus: Hermès International (RMS-FR)
Hermès International manufactures, distributes and sells luxury apparel products, including leather goods, ready-to-wear accessories, silk and textiles as well as perfumes and watches. The company was founded by Thierry Hermès in 1837 and is headquartered in France.
RMS-FR targets the absolute luxury segment, which has proven to be more resilient to adverse economic conditions and less susceptible to fashion risk, than the aspirational or accessible market segments. The company has achieved superb financial results over the long term, with high returns on capital, high margins and no sales declines in twenty years, highlighting the durability and power of an ultra-luxury brand.
RMS-FR’s key competitive advantage relates to its reputable brand, which is synonymous with quality craftsmanship and creativity. Its leather goods are still handmade in France, as they were years ago when the company made saddles for aristocrats throughout Europe. In addition, RMS-FR has adopted a model of limiting supply, resulting in large unmet demand for its products; the waiting period for its most popular bags can be longer than a year. This combination has afforded the company very strong pricing power and allowed it to extend its brand to other product segments.
The company’s future growth will be underwritten by improving the productivity of its existing network, leveraging pricing power and brand extension, rather than rolling out new stores. In fact, store count has decreased over time, as RMS-FR seeks to remain exclusive and control supply, thereby avoiding the dilution of its strong brand and quality position. Over the very long term RMS-FR has the option to grow its network incrementally as its network is small compared to the networks of its global peers.