TIP659: Hermès Stock Deep Dive w/ Shree Viswanathan
Sep 13, 2024
01:42:24
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Shree Viswanathan, founder and portfolio manager of SVN Capital, dives deep into Hermès, the luxury powerhouse known for its crafts like the Birkin bag. He discusses Hermès’ impressive 20.6% stock growth since its IPO, the brand's long-term thinking, and its strong market moat. The conversation delves into the attempted takeover by Bernard Arnault, strategic growth opportunities, and Hermès' unique approach to capital allocation. Listeners gain insights into the brand's resilience and the evolving risks in the luxury market.
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Quick takeaways
Hermès' exceptional long-term financial performance, with a 20.6% annual share growth since its IPO, outpaces the S&P 500 significantly.
The brand's unwavering commitment to craftsmanship and quality ensures its products stand out in the crowded luxury market.
Despite its successes, Hermès faces risks related to consumer preferences and economic fluctuations that require ongoing adaptation and management.
Deep dives
Hermes' Exceptional Growth and Performance
Hermes has demonstrated impressive financial performance since its IPO in 1993, with shares compounding at an annual rate of 20.6%, significantly outperforming the S&P 500's total return of 10.4%. Founded in 1837, the company has maintained its status as one of the most valuable luxury brands, famous for products like the Birkin and Kelly bags, as well as silk scarves and leather goods. The enduring quality and commitment to craftsmanship have contributed to its reputation, resulting in a market capitalization that reflects its legacy and brand value. This remarkable growth trajectory is a testament to Hermes' strategic focus on long-term value rather than short-term gains.
The Importance of Craftsmanship and Quality
Craftsmanship and quality are at the heart of Hermes' ethos, with an emphasis on artisanal skills that elevate its products in the luxury market. Each item is meticulously handcrafted, with a focus on detail that differentiates Hermes from cheaper, mass-produced alternatives. The commitment to quality is evident in their production practices, such as training artisans rigorously to ensure the longevity and beauty of each product. This pursuit of excellence means Hermes' products are not only designed to last but are also created with an intention to enhance their appeal over time.
Family Ownership and Long-Term Vision
Hermes operates as a family-controlled business, with the founding family owning 67% of the company shares, which fosters stability and consistency in its long-term strategy. This ownership structure supports a unique management approach focused on preserving the brand's heritage while allowing for thoughtful evolution. The company has a remarkable history of generational leadership, ensuring that the founder's mentality and commitment to quality persist within the organization. This familial control not only preserves the essence of Hermes but also plays a crucial role in its enduring success and resilience against market pressures.
Navigating Risks and Competitive Pressures
Despite its impressive legacy, Hermes faces risks inherent in the luxury sector, including shifts in consumer preferences and economic fluctuations. The brand's resistance to compromising quality for increased production underlines its commitment to long-term brand value, which may pose challenges during times of economic downturn. Additionally, reputational risks, such as those pertaining to sources of materials and animal welfare, require careful management to maintain consumer trust. These challenges highlight the necessity for Hermes to continuously adapt while adhering to its core values of quality and craftsmanship.
Valuation and Market Expectations
Hermes is currently valued at a high P/E ratio of around 50, reflecting the market's expectations for continued strong performance and growth. This premium valuation indicates that investors are confident in Hermes' ability to maintain its profitability while expanding in a competitive market. The historical track record of revenue and earnings growth supports this valuation, as Hermes has consistently outperformed many of its peers in the luxury sector. Understanding this context can help investors appreciate the underlying strength of the brand, even as it navigates the complexities of market dynamics.
Future Growth Opportunities
The growth trajectory for Hermes remains positive, with expectations for a robust luxury market in the coming years, particularly in emerging regions like India and Southeast Asia. The company's strategic focus on expanding store presence, combined with a continued commitment to high-quality production, positions Hermes well for capturing new market opportunities. Additionally, planned price increases are indicative of the brand's strength, helping to enhance revenue while preserving exclusivity. As demand for luxury goods persists, Hermes is poised to leverage its heritage and craftsmanship to sustain growth across global markets.
On today’s episode, Clay is joined by Shree Viswanathan for a stock deep dive on Hermès. Hermès is a luxury goods manufacturer renowned for its high-quality craftsmanship. The brand is known for its iconic products, such as the Birkin and Kelly bags, silk scarves, and equestrian-inspired items.
Since the IPO in 1993, shares of Hermès have compounded at 20.6% (excluding dividends), while the S&P 500 had a total return of just 10.4%.
Shree Viswanathan is the founder and portfolio manager of SVN Capital.
IN THIS EPISODE YOU’LL LEARN:
00:00 - Intro
02:38 - A business overview of Hermès.
10:28 - Examples of Hermès thinking exceptionally long-term in their business strategy.
30:16 - The attempted takeover of Bernard Arnault.
37:59 - The strength of Hermès’ moat.
56:01 - The growth opportunities ahead for Hermès and the luxury industry more broadly.
01:03:22 - How Hermès approaches capital allocation.
01:14:15 - Shree’s thoughts on Hermès’ valuation.
01:29:51 - Risks that investors should monitor for Hermès.
And so much more!
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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