Investing.com -- Hermès (EPA:HRMS) has both a structural competitive advantage and brand momentum despite a "high valuation," analysts at Bernstein said on Tuesday in a note raising their rating of the luxury group to "Outperform."
The analysts also upgraded their growth expectations for the French company, citing "strong" first-quarter earnings that were boosted by expansion at its leather goods division. The Birkin bag maker has become one of the more consistent performers in the luxury sector, shrugging off broader economic headwinds. The company has pushed to manage both its production and stocks, helping to boost its exclusive reputation.
Although they noted that Hermès's pricier valuation diminishes its attractiveness to some investors, the Bernstein analysts argued that it is still a "high-quality" business that is less prone to cyclical variations in performance.
As a result, they viewed Hermès as an "insurance policy" in their portfolio against possible risks stemming from sluggish consumer confidence in major luxury market China, an accelerated slowdown in demand among Western shoppers, and geopolitical tensions.
For the broader luxury market, the Bernstein analysts reduced their growth expectations to 6% from 7% for 2024, flagging "uncertainty" in the second half and a "slow start" in the first quarter of the year.
"Reacceleration in [the second half] depends on Chinese consumers finding reassurance as Western consumers sober up from YOLO euphoria," the analysts said, using the acronym for "you only live once" to refer to a post-pandemic period of heavy spending on luxury goods. "The jury is out on how effective the Chinese government efforts will be and how political and geo-political risks will play out."