Hermes Profit Can Mean Scaling Back Handbags Overproduction

(Bloomberg Gadfly) -- Hermes International SCA never seems to go out of style. It needs to make sure it stays that way.

True to form, the French luxury group reported third quarter sales that beat analysts' forecasts, driven by a 16.3 percent gain in its key leather goods division and improvement in Asia. That's adding to signs that the luxury sector's shaken off its recent malaise.

But this success is a double-edged sword -- part of the outperformance was due to its strategy to manage a difficult environment by raising handbag production.

As Gadfly has argued, pumping out too many Kelly or Birkin bags, as well as newer models, the Constance, Halzan and Lindy, could damage Hermes' air of exclusivity -- particularly if the luxury recovery becomes more entrenched and there are too many of its prime purses milling about.

Hermes on Thursday affirmed its September projection for underlying sales growth to be below 8 percent. With both the broader environment and demand for its products improving -- particularly in China -- Hermes should take this opportunity to preserve its cache by returning to a more careful approach to managing handbag production. 

The shares trade on a forward price earnings ratio of 33 times, a significant premium to the Bloomberg Intelligence luxury peer group's ratio of about 18 times.

That implies Hermes will remain the most desirable. It should do all it can to make sure that's the case.

While that's bad news for those on the waiting list for a Birkin bag, it should help to preserve value in the long-term.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.