Why Hermès Is the Gold Standard of Luxury Stocks
…and at what price it might be a solid addition to your long-term portfolio.
Today, our analysis of quality compounders takes us into a unique industry, one characterized by timeless appeal and unparalleled exclusivity: the luxury sector.
At the center of our analysis is a company renowned for its craftsmanship and heritage—Hermès, the maker of the iconic Birkin and Kelly bags. The company focuses primarily on leather goods, fashion accessories, and ready-to-wear, but it also operates in areas such as perfumes, watches, and home collections. Few brands have managed to retain such exclusivity and global appeal while remaining largely family-owned and focused on long-term value creation. Let’s take a closer look at the company behind one of the most enduring success stories in the luxury industry.
Inside Hermès: A Closer Look at the Business
Hermès was founded in Paris in 1837 by Thierry Hermès and is still, to this day, largely controlled by his descendants. Now led by the sixth generation of the founding family, Hermès is controlled by three branches of the family tree: the Dumas, Guerrand, and Puech families. Together, they own around 67% of the company (and 76% of voting rights), either directly or through the family-controlled holding company H51. This holding was created in 2011 in direct response to a hostile takeover attempt by LVMH and serves one primary purpose: to secure long-term control of the company within the founding family.
The company has been led since 2014 by Axel Dumas, a sixth-generation member of the founding family. Before that, he oversaw its jewelry and leather goods divisions. His leadership reflects the company’s defining philosophy—resisting trends, focusing on craftsmanship, and refusing to compromise on quality. As he once said:
“My uncle used to say we are not a luxury company, but a high-craftsmanship company. He would also say: I do not look at what others do—I could be influenced.”
This mindset encapsulates Hermès' strategy: detached from market noise and short-term pressures, the company focuses on long-term value creation. The family’s presence isn’t symbolic—it permeates the company’s governance and culture. Three of the seven board members are family members. But the family’s involvement goes beyond ownership. Pierre-Alexis Dumas, a descendant of the founder, serves as artistic director and oversees the creative identity of the brand.
The strong involvement of the founding family has a direct impact on Hermès’ business model. Strategic decisions are shaped by a long-term mindset, with a clear focus on sustainable value creation rather than short-term performance. This continuity allows the company to maintain a consistent course that prioritizes brand integrity and resilience over immediate growth.
The founding families place great importance on sharing the company’s success with its employees—a principle that is deeply embedded in Hermès’ culture. More than 16,000 of the company’s 25,000 employees are shareholders, and in 2024, all staff received a one-time bonus of €4,500 in recognition of their contribution.
Internally, Hermès is structured around 16 métiers—highly specialized craft divisions that reflect the artisanal heart of the company. While brand, strategy, and quality are managed centrally, the individual métiers are given creative freedom. This unique structure fosters both specialization and agility, ensuring that every product carries the same standard of excellence.
For a holistic view of the company's structure, it's essential to consider how its products are made—especially for a business that places such a strong emphasis on quality.
A significant share of production takes place in-house, primarily in France, and Hermès works closely with long-standing suppliers under carefully managed partnerships. The aim is not just operational efficiency, but the preservation of tradition, craftsmanship, and consistent quality. These values are embedded in every stage of the value chain and form a key pillar of the company’s strategy.
Hermès generates its revenue across several distinct product segments, each reflecting a different facet of the brand’s identity. The largest segment is Leather Goods and Saddlery, which includes the iconic handbags and represents the core of the company's heritage and craftsmanship. Silk and Textiles includes scarves and ties—products that are closely associated with the visual language of the brand. Perfumes and Beauty covers a range of fragrances and cosmetics, combining creative expression with broader accessibility. The Watches segment reflects Hermès’ expansion into fine watchmaking, while other sectors include ready-to-wear collections, footwear, and accessories. Finally, the segment Other Products includes items such as jewelry and home goods.
Let’s take a look at where in the world Hermès generates its sales. The Asia-Pacific region is by far the most important market, contributing around 44% of total revenue. Demand is particularly strong among China’s upper class, which plays a central role in the company’s growth. Other key regions include the Americas with 19%, Europe excluding France with 14%, and the French domestic market with 10%. This geographic distribution reflects the company's strong positioning in both mature and emerging luxury markets.
Now that we have a first overview of the company, let’s take a closer look at what lies beneath the surface.
Hermès and the Art of Long-Term Growth
After understanding the values and structure behind Hermès, the next question is how this translates into growth. The company focuses on steady, organic growth rooted in long-term thinking. It deliberately avoids aggressive expansion, acquisitions, or short-term marketing pushes—choosing instead to grow at its own pace and on its own terms. But how much room for further growth remains in a business that limits supply by design and caters to a highly selective customer base?
A look at the company's growth over the past decade illustrates just how solid the company’s foundation is. Between 2014 and 2024, revenue increased organically by around 14% per year, while net income grew by 18.3% annually. These figures not only highlight the company’s consistent performance, but also point to a strong market position and significant pricing power—topics we will return to later in this analysis.
Let's take a look at the current situation. The focus is currently on investments in future growth as well as the challenging situation in the Asian market.
While Hermès reported 13% revenue growth in 2024, operating income increased by only 9%. This margin pressure is largely explained by a rise in selling and administrative expenses—primarily driven by higher personnel costs in retail and increased rental expenses as the company continues to expand its store network. Despite this temporary margin dilution, these investments are aimed at strengthening Hermès’ long-term positioning.
Given the challenging economic environment in China, where the entire luxury industry is currently experiencing headwinds, Hermès' results can still be considered solid. The company’s continued expansion and operational discipline suggest that the current margin softness is likely to be temporary and should support sustainable growth going forward.
Hermès’ recent performance highlights the company’s ability to grow steadily while staying true to its long-term strategy. Growth has been entirely organic, supported by strong demand, controlled price increases, and targeted investments in production and distribution.
Since 2020, the company has raised prices by approximately 28%, with an additional increase of 6.5% planned for 2025—well above the industry average. At the same time, Hermès is expanding its distribution network in Asia and strengthening its production capacity through new workshops and training centers in France.
But what might Hermès’ future growth look like? The market for personal luxury goods reached a size of roughly $390 billion in 2024, with about 40% coming from the Asia-Pacific region. Over the next five years, the market is expected to grow by around 6.8% per year, reaching close to $580 billion by 2030. This expansion is driven by rising wealth in emerging markets, especially China and India.
At the same time, several long-term trends are reshaping the luxury industry. Younger customers are becoming more important, expectations around sustainability and ethical sourcing are increasing, and the shopping experience itself is gaining relevance. Hermès is responding to these developments carefully, placing continued emphasis on traditional craftsmanship, product quality, and the in-store experience.
One example of this is the highly exclusive appointment system for leather goods: customers often need to schedule a personal consultation to purchase a handbag. These appointments are designed to be intimate, tailored experiences—reinforcing the brand’s exclusivity and turning each purchase into a memorable moment.
As impressive as Hermès' growth has been, there are structural limits that naturally constrain its long-term expansion.
The company’s production is bound by the availability of highly trained craftspeople, and the brand’s identity depends on maintaining strict exclusivity. Unlike many other luxury players, Hermès does not pursue scalable growth through licensing or aggressive product diversification. In addition, the number of potential customers is limited by the high price point of its products. These self-imposed boundaries are central to the company’s strategy—but they also mean that growth will always follow a more measured and selective path. But with just under 4% market share in a nearly €400 billion market, Hermès still has room to expand—carefully, and on its own terms.
Given the structural growth of the luxury market, Hermès’ strong pricing power, and its ongoing investments in production capacity, it is reasonable to expect that the company will continue to grow at a rate above the industry average over the medium term.
Winning in a Crowded Market: The Competitive Advantage of Hermès
The luxury industry is highly competitive. This makes it especially important for a company to have a strong and lasting advantage over its competitors. In the case of Hermès, this advantage is built on a combination of factors—but at the center of it all stands the brand itself, which is universally associated with exclusivity, heritage, and exceptional quality.
Hermès operates in the same industry as luxury giants like LVMH and Kering—but plays by fundamentally different rules. While brands like Louis Vuitton and Dior from LVMH appeal to a wide range of wealthy customers, Hermès focuses only on the ultra-wealthy. This difference in positioning explains why Hermès remains resilient even when other players face economic headwinds.
In times of economic uncertainty—such as the current slowdown in China—brands under LVMH and Kering often see softer demand. Their reliance on trend-driven fashion, frequent new collections, and influencer marketing makes them more sensitive to changing consumer moods. Additionally, LVMH and Kering tend to focus on scaling effects and mass production in lower-cost regions like Asia and Eastern Europe, often outsourcing parts of their quality management. Hermès, by contrast, limits supply, avoids sales and outlet channels, and prioritizes long-term brand strength. This approach reduces exposure to economic cycles and market volatility.
This strategy is most visible in the distribution of Hermès’ iconic handbags. Products like the Birkin and Kelly are not openly available for purchase. Customers must make personal appointments and are carefully selected, often based on prior purchases. In addition the bag production intentionally grows only by 7–10% annually—below the rate of demand—to create artificial scarcity. This scarcity supports both the brand’s exclusivity and its pricing power.
Manufacturing plays a critical role in maintaining this exclusivity. About 74% of Hermès products are handmade in France, and 55% are produced entirely in-house. The company controls 64 of its 75 production sites, including specialized workshops for leather goods, watches, perfumes, and textiles. Employees often undergo multi-year training at Hermès’ own schools—training that is essential to uphold the highest quality standards. This commitment to craftsmanship and internal development forms a core part of Hermès’ competitive moat, creating barriers that are difficult for competitors to overcome.
Hermès also has tight control over its supply chain. The company sources most leather from France, Italy, and Spain and owns several tanneries. It maintains long-term partnerships with over 100 suppliers with average contracts lasting 19 years. This stability helps ensure consistent quality and operational independence. Sustainability and animal welfare are integral to these partnerships.
The retail network reflects this selective approach. Hermès operates 293 stores worldwide, with over 90% of sales made offline. Store locations are carefully chosen, and the in-store experience emphasizes personal service and brand heritage. Owning the retail environment allows Hermès to maintain full control over pricing, presentation, and customer relationships.
In summary, Hermès has built a wide and durable moat around its business. Its brand strength, tradition, and operational discipline provide advantages that are hard to replicate. While barriers to entry in luxury might seem low initially, matching Hermès’ combination of craftsmanship, infrastructure, and emotional appeal is practically impossible.
The Profitability Behind Hermès' Success
The competitive advantages that drive Hermès’ growth should ideally also translate into strong and sustainable profitability. In this chapter, we take a closer look at the company’s profit development, key cost drivers, and the nature of its investments to understand how Hermès balances growth with financial discipline.
Key cost areas for Hermès include raw materials and manufacturing expenses, logistics, selling and administrative costs—primarily salaries for retail staff and store rents. Thanks to long-term contracts with suppliers, diversified sourcing, and significant pricing power, it can mitigate risks related to cost fluctuations and maintain stable margins.
Currently, Hermès is investing heavily in expanding its production capacity and retail network, particularly in France and Asia. These growth investments lead to higher expenses in the short term but are expected to support sustainable expansion and profitability in the future.
As already mentioned in the chapter on growth, the margin is currently under some pressure due to several factors.
In 2024, revenue grew by 13%, while operating income increased by 9%. The slower profit growth mainly reflects higher selling and administrative expenses due to increased staffing and rental costs associated with new store openings. Additionally, ongoing challenges in key markets like Asia are expected to continue exerting some margin pressure in the near term.
A look at the margins of Hermès and its competitors reveals: Due to its competitive advantages, resulting pricing power, and focus on ultra-wealthy customers, it has historically achieved margins significantly higher than its competitors and has been able to maintain these margins at a high level over time.
It should also be noted that the decline in free cash flow is primarily due to the significantly increased investments supporting growth. Hermès operates a relatively capital-light business model, as its durable assets require only modest maintenance investments. Even with the current level of growth spending, the company maintains sufficient financial flexibility.
The company consistently delivers exceptional returns on invested capital (ROIC) and return on equity (ROE), placing it well above many competitors in the luxury sector. These strong financial metrics demonstrate the company’s ability to efficiently generate profits from its capital base, reflecting the strength and sustainability of its competitive advantages.
Financial Stability as a Strategic Asset
For a company like Hermès, a clean and solid balance sheet plays a crucial role in supporting long-term success. Hermès has virtually no financial debt. Most of its reported liabilities stem from Right-of-Use (ROU) assets, which correspond to leasing obligations for stores and logistics facilities. Excluding these lease liabilities, the company is essentially debt-free.
The company’s tangible assets consist mainly of production facilities located in France. Unlike competitors who produce in regions with higher political risks, Hermès benefits from a stable and predictable operating environment in France, reducing uncertainty.
Its strong liquidity position confirms the conservative approach to asset management. Nearly 50% of the balance sheet consists of cash and cash equivalents, totaling €11.6 billion. This substantial cash reserve ensures financial flexibility for growth investments.
In summary, Hermès boasts a very clean balance sheet with a net cash position of approximately €9.5 billion. This strong financial foundation not only supports growth opportunities but also enhances resilience during challenging times and leaves room for potential special dividend payments.
Sustainable Payouts Backed by Strong Fundamentals
The founding family places great importance on regular dividend payments, but always with an emphasis on sustainability. Dividends are intended to reward shareholders without compromising the company’s ability to invest in long-term growth.
Hermès has consistently paid dividends comfortably covered by its free cash flow. The current payout ratio stands at approximately 35%, reflecting a balanced approach to shareholder returns and reinvestment.
A look at the historical dividend growth reveals that it has increased at a compound annual growth rate of 18.4% over the past ten years. This level of growth should be achievable again over the medium term.
In addition to the regular dividend, Hermès recently declared a special dividend of €10 per share. This extraordinary payout aims to distribute excess cash that is not required for growth, signaling that the company does not plan acquisitions or expansion into new markets that could jeopardize its focus.
According to the 2024 annual report, the decision to pay special dividends will continue to be made on a case-by-case basis, reflecting the company’s commitment to balancing shareholder returns with careful capital management.
Valuation: When Quality Comes at a Premium
Having examined the company in detail, we now turn to its valuation and consider at what price buying the stock would make sense.
I have valued the company using a discounted cash flow (DCF) model based on the following assumptions:
8% revenue growth for 2025, reflecting somewhat weaker growth due to the economic slowdown in the Asian market, followed by a conservative 12% annual growth through 2034. This aligns with market expansion, pricing power, current production capacity increases, and historical company growth.
Operating margin of 35%, consistent with the company’s 10-year historical average.
Cost of equity: 8.9% (based on estimates from Aswath Damodaran).
Cost of debt: 8.1% (based on estimates from Aswath Damodaran).
Perpetuity growth rate: 2.5%.
Based on these conservative assumptions, I arrive at a fair value of approximately €1,500 per share. The current share price is around €2,383 so to reach the fair value, the stock price would need to decline by approximately 37%. Therefore, in my view, the company is overvalued.
It could be argued that a premium valuation is warranted for a company of such high quality. This assessment is reasonable. However, this premium is already reflected in the assumptions used in the valuation model. The model incorporates strong growth prospects and solid margins that exceed those of the broader market and key competitors. As such, the company’s quality is already embedded in the underlying assumptions.
Final Thoughts
Throughout this analysis, it has become clear that Hermès embodies the qualities that define a true quality compounder. As a family-led company, it pursues a long-term and sustainable strategy that consistently aligns with shareholder interests. This disciplined approach is reflected in its ability to deliver solid growth while remaining largely insulated from economic cycles that often unsettle other businesses.
What truly sets Hermès apart is its formidable competitive moat, characterized by exceptional margins, a strong brand, and a clean balance sheet. These strengths not only underpin its current success but also provide a foundation for continued value creation over time.
For investors seeking high-quality companies with resilient business models, Hermès ticks all the boxes. However, at the current valuation, the stock appears stretched, which calls for patience. I will therefore add Hermès to my watchlist and await a more attractive entry point before initiating a position.
I hope you found this analysis insightful and engaging. Please feel free to share your thoughts, and subscribe to stay updated on Hermès and other compelling investment opportunities.
Excellent deep dive, Daniel! The connection you pinpointed between family ownership business and long-term strategy, is exactly what I am looking for as a dividend investor. The only flaw from this company, I would say, is.... its price!!! :) above €2000! which for sure makes it not affordable for most of retail investors, they should definitely consider a stock split to be honest
Excellent article Daniel! This company is so mesmerising, for us as investors and as consumers. You can only have reverence for the family and the legacies that have built what is one of the greatest business in the world.