Hermès, the renowned luxury fashion brand, has reported exceptional financial results for the year 2021, despite the challenges posed by the Covid-19 pandemic. The company experienced a remarkable growth rate of 41.8%, generating €8.9 billion in revenue. The operating margin was an impressive 39.3%, and net profit increased by 76.5% to €2.4 billion. These figures demonstrate that Hermès had its best year ever, surpassing its performance before the pandemic by 33%.
However, despite these outstanding results, the company’s share price experienced a decline on the Paris stock exchange. This can be attributed to a slowdown in the fourth quarter, particularly in its core business of leather goods. Hermès’ unique organic growth strategy, which focuses on producing high-quality products through vertically integrated production, paradoxically hindered the brand’s ability to meet the growing demand.
The company’s fourth-quarter sales reached €2.3 billion, representing a growth of 11% at constant exchange rates compared to the previous year. While this growth rate is still significant, it indicates a slowdown in comparison to the overall growth achieved by the company. The leather goods and saddlery segment, which accounted for nearly half of Hermès’ revenues, experienced a decline of 5.4% in the last three months of 2021 compared to the same period in 2020.
During a conference with analysts discussing the annual results, Axel Dumas, the executive chairman of Hermès, acknowledged the constraints and slowdowns caused by the health situation in 2021. He emphasized that Hermès’ leather goods are made entirely in France and despite the challenges faced, the company still achieved a 23% growth rate over the past two years.
Looking ahead, Hermès forecasts a volume growth of 6-7% for leather goods in 2022, along with increased prices. The brand observed that all product categories experienced unprecedented demand during the crisis, marking a departure from the past where leather goods absorbed the impact of economic downturns. The company sold all its inventory, highlighting the high demand for its products.
To address this growth in demand, Hermès has made substantial investments in its production facilities. In 2021, the brand opened two new leather goods workshops in France, with plans for further expansion in the coming years. Hermès aims to open a new factory every 12 to 18 months to keep up with the increasing demand. Additionally, the company continues to hire new employees, filling approximately 1,000 positions each year. In 2021 alone, over 1,000 new employees joined Hermès, bringing the total workforce to 17,595, with 10,969 in France.
The workforce is a crucial aspect of Hermès’ strategy, and the company places great importance on employee satisfaction. As a token of appreciation for their contributions, all craftsmen and salespeople in France received a monthly gross increase of €100, and each employee worldwide received a bonus of €3,000, amounting to approximately €70 million. Furthermore, Hermès has implemented free share plans, distributing shares worth nearly €800 million to its employees.
One factor contributing to the slight slowdown towards the end of the year is Hermès’ approach to pricing. The brand prides itself on offering products that are not only of exceptional quality but also possess an authentic appeal. Rather than using prices as a tool to increase sales, Hermès sets its prices based on manufacturing cost increases. The company follows a strategy of organic growth and exercises caution when it comes to price increases, although it does account for production costs. The annual price inflation for Hermès products is approximately 3%, with this year’s increase standing at around 3.5%.
In conclusion, while Hermès has achieved remarkable success in recent years, the brand faces challenges in meeting the increasing demand for its products. Through investments in production facilities, expansion of the workforce, and a commitment to quality and authenticity, Hermès aims to continue its growth trajectory in the luxury fashion industry.
Useful Links:
Hermès Official Website
Hermès Stock Performance on Bloomberg
