Where will Hermès be in 2020?

In spite of going through some turbulent times in the press, French luxury house Hermès has continued to thrive. Any shareholders with concerns that negative press may affect Hermès image or sales need not worry however, as the luxury fashion house has continued to defy any trend of slipping revenues as noted among peer labels. Instead Hermès reported first half sales for 2015 of 2.3 billion euros, up from 1.9 billion euros during the same period in 2014.

As the fashion label continues to grow, it becomes more and more of an appealing conquest for any investor, but particularly for shareholder luxury conglomerate LVMH which failed an attempted company take over last year. Although LVMH, Dior and Groups Arnault have all pledged not to acquire any more shares in Hermès for the next five years, FashionUnited asks how Hermès family will manage the company's growth over the next five years whilst retaining control by 2020?

Hermès is 7th largest fashion company in the world

Unsurprisingly to some, Hermès is currently the 7th largest fashion company in the world with a market value of 36.2 billion euros, making it just over two times smaller than its 10.3 percent stakeholder LVMH. This alone is quite an achievement for Hermès as a single branded company against a luxury conglomerate holding over 70 luxury labels in a wide category of fields - an accomplishment that is also reflected in its brand value. Hermès is currently the 5th most valuable fashion brand in the world, with a net worth of 6.3 billion euros. This is mostly thanks to its strong heritage and iconic staples such as the Birkin bag and silk scarf.

Over the past four years Hermès has seen its total revenues increase 70 percent from 2.4 billion in 2010 to 4.1 billion euros in 204. The French luxury label had an average growth of 118 percent over the past five years, with sales for the the full financial year 2015 predicted to be around the 5 billion euros mark. Hermès has shown a stable growth in revenue over the past five years and is expected to continue doing so as long as it keeps investing in its staples, like the Birkin bag, which continues to be in demand in spite of ongoing protests from animal right organization PETA.

But 45 percent of its revenue coming in from leather goods and saddlery line, it comes as no surprise that shareholders were concerned with PETA’s undercover investigation focusing on animal cruelty on its alligator farms, as its exotic skin handbags can cost upwards of 50,000 dollars. However, in spite of the bad press, Hermès leather goods revenue share actually increased one percent to 46 percent of total revenue in the first half of 2015. Therefore it can be said that this division from Hermès is safe from harms way and seems likely to remain the driver of the label ongoing growth.

What will the future bring Hermès

With Hermès continuing to thrive in the face of adversity, is seems as if the label would likely make an ideal addition to any holding. In fact, it was just over a year ago that Hermès was thrown into the media spotlight after its family attempted to secure its shares following LVMH try to obtain a controlling stake. This was seen as a potential threat to the ownership of and voting rights of the family in the company and eventually ended in an agreement between Hermes and LVMH, which saw the luxury conglomerate, that currently owns 10.3 percent stake, pledge not to purchase any new shares for five years. But with this settlement ending in September 2019, LVMH will stand another chance in gaining more shares in the 5th most valuable fashion brand, making it a high risk for the Hermès descendants.

Although the Hermès family is unlikely to lose total control of the luxury label to LVMH thanks to h51, a holding company it founded in 2011 which hold a total of 59.0 percent of Hermès shares for the next 20 years, LVMH may still be able to acquire the remaining free float shares, which account for 17.8 percent of Hermès shares. If so, this would mean that LVMH would have a 25.0 percent voting right in Hermès. However this prestige right would still see the family in majority control of the company and cost LVMH roughly 5 billion euros studying current share prices, Nevertheless, LVMH previously held 22.3 percent in Hermès prior to selling a large part of its shares to its own shareholders as part of its deal with the luxury label last year. But after the agreement comes to an end LVMH may be able to trade or purchase back the Hermès shares it gave to its shareholders, which would see them get closer to holding a voting rights stake.

FashionUnited predicts that the Hermès family will most likely own 72.3 percent of its company share, with another 20 percent owned by LVMH and its shareholders, 7.7 percent being accounted for either free float or treasury shares. This means that by 2020 Hermès will still be in the hands of its founding family, but it remains to be seen if all other shares have been snatched up by LVMH. However as the company and its revenue continue to grow, its share price will not become any cheaper making impossible for the family to buy back its own shares.

According to FashionUnited’s calculations, as long as Hermès remains true to its classic, iconic products it will continue to thrive, with its market value growing to reach 51.8 billion euros by 2020. With the label performing particularly well in Asia and rapidly growing in Europe, FashionUnited expects total revenue growth to continue at a 10.1 percent rate from 2018 onwards to hit 8.5 billion euros by 2020. In addition, its leather goods and saddlery division will account for 50 percent of its total sales in 2020, increasing from 1.8 billion euros in 2014 to 4.25 billion euros in 2020. In other words, the 2020 leather goods’ sales will be equivalent to 1.3 million Hermes’ Victoria II bags or close to 50,000 hand-made Birkin bags.

So Hermès outstanding growth is sure to ensure the family’s majority control as long as they remain true to the brand’s heritage.

This is the eighth episode of a new series based on FashionUnited's unique business intelligence Top 100 Index. Stay tuned next week's episode on November 13, which focuses on Net-a-Porter.