High quality+scarce consumption took over the investment tone after AI plummeted! Hermes maintains scarcity premium with 41% profit margin and €12.9 billion in cash
The Zhitong Finance App learned that the latest quarterly sales increase announced by European luxury goods giant Hermes is in line with the market's unanimous expectations. At a time when global demand for luxury goods is sluggish, the stock price and performance fundamentals of the iconic Birkin bag manufacturer Hermes are far superior to those of its peers. However, Asian markets such as China, which are critical to Hermès, failed to achieve further recovery, dragging down its stock price trend.
Hermès said in a statement on Wednesday local time that at a fixed exchange rate, overall revenue for the second quarter increased 6.7% to about 4.1 billion euros (about 4.7 billion US dollars). This increase was higher than analysts' unanimous expectation of a 6.51% increase.
A team of Jefferies analysts led by James Grzinic wrote in a report that “the continued lack of growth momentum in Asian markets such as China” is still worrying. Hermès shares fell 5.3% during early trading in the Paris stock market. As of Wednesday, the stock had fallen by about 20% this year.
As the South Korean stock market, which has the title of “AI computing power weather vane,” falls into a bear market, and the Philadelphia Semiconductor Index of the US stock market falls into a bear market, and global AI computational power-themed momentum transactions such as AI semiconductors cool down, capital is shifting from high-leverage computing power beta to low-pressure quality stocks, and the market's leading forces are expected to spread from semiconductors to consumption/cycle/medical/big finance defense assets with abundant cash flow for the next round of alpha potential.
According to a team of strategists from top Wall Street banks such as Citibank, Morgan Stanley, and Jefferies, the market surrounding AI computing power-related technology stocks will continue to fluctuate sharply in the future. It is time for investors to rebalance their portfolios that have become excessively focused on AI-related high-valuation technology stocks — that is, “the main AI line has not yet stopped, and the bull market is beginning to spread and rotate towards non-AI technology.”
Hermes and Coca Cola do share a brand moat, pricing power, strong cash flow, and extremely low balance sheet risk, which is rare in the world. They may also benefit from capital rebalancing from high leverage, high capital expenses, and high-momentum AI hardware computing power transactions to high-quality assets. However, Hermes cannot be completely equated with Coca-Cola-style defensive stocks plus high-quality cash flow alpha. Coca Cola is an essential consumer product with high demand frequency and low economic sensitivity; Hermes is still an optional consumer and luxury product in the industry category, and is more affected by wealth effects, travel traffic, Chinese demand, and exchange rates.
Rather than keep up the brand moat: Hermès survives the winter of luxury goods with craftsmanship, leather and limited supply
The luxury goods industry is being impacted in many ways: consumers in Asian countries such as China are tightening their spending against the backdrop of high energy prices caused by the geopolitical conflict in the Middle East. Inflationary pressure has prompted consumers to be more cautious, and the Middle East war has hit the hot demand in shopping malls in the Middle East such as Dubai, and affected tourist traffic to Europe. Hermès Executive Chairman Axel Dumas told analysts on a conference call that the Chinese market, which was once a key growth engine for the industry, has yet to overcome the difficulties of recent years.
At the performance conference, he said, “I see that the Chinese market is stabilizing, but we have yet to see a fundamental recovery.” He added that the company is still growing in China, but the growth rate is below the level of strong growth in recent years.
Compared to many of its competitors, Hermès has greater exposure to the Chinese market. The broad Asian region, including China, contributed about 43% of the company's revenue in the first half of the year. In contrast, Asia (excluding Japan) accounted for 29% of the revenue of the LVMH Group (i.e. LVMH, the parent company of LV) during the same period.
Over the past three months, Hermès' resilience growth data was mainly led by the American market, where the region recorded a 13.7% increase. France, an important global tourist destination, grew by 6.2%; although regions including the Middle East still recorded negative growth, there was an improvement from month to month. The company said the region “continues to show extraordinary resilience in a geopolitical environment of long-term instability.”
In terms of performance for the first half of the year, Hermes' revenue for the first half of 2026 increased from 8.034 billion euros in the same period last year to 8.163 billion euros, up 6.1% at the fixed exchange rate and 1.6% at the actual exchange rate; recurring operating profit increased slightly from €3,327 billion to €3.51 billion, and the recurring operating margin was still as high as 41.0%, down only 0.4 percentage points from 41.4% in the same period last year; the Group's net profit was 2,238 million euros, which was basically the same as 2,246 billion euros in the same period last year.
The conflict in the Middle East and the reduction in purchases by consumers looking for high-end products have impacted the entire luxury industry. However, with a long waiting list of its products, especially Kelly bags and Birkin bags (Birkin), and Hermes' unique “luxury business model” that stimulates demand and maintains high prices by limiting the supply of popular products, Hermès has shown strong demand and resilience to growing performance.
Before Hermès announced its results, the results announced by market leaders LVMH Group, Burberry Group Plc (Burberry Group Plc), and Merck Fen were mostly disappointing. These brands are more open to the fashion and leather goods business. However, the Richemont Group has achieved strong results, driven by jewelry brands such as Cartier and Van Cleef & Arpels, indicating that consumers are still willing to spend a lot of money on luxurious and refined luxury goods, but are only becoming more cautious in choosing.
Some analysts questioned whether Hermès needed to take difficult but necessary steps to reduce leather goods production in order to maintain brand value.
In response to this issue, Dumas told analysts at the performance conference that Hermes' production capacity is naturally constrained by the scarcity of skilled craftsmen and the limited supply of high-quality leather, and the leather supply chain is becoming more industrialized.
“If we really can't find enough high-quality and luxurious bespoke leather supplies in the short term, I won't be producing them,” he stressed.
The European luxury goods giant is progressing as planned to open a new large-scale leather goods manufacturing factory in France every year until 2030. Dumas said that since then, different regions have contacted him, hoping that the company can set up local factories and bring huge employment growth.
The wave of capital rebalancing re-evaluates the alpha of global high quality+scarce consumption
As far as Hermès' stock price and valuation is concerned, this is a financial report with high fundamental quality, but not enough to constitute a “significant advantage over expectations” for the stock price. Fixed exchange rate revenue increased 6.7% in the second quarter, basically in line with market expectations; the leather goods business, which accounts for nearly half of revenue, grew by about 10%, slightly lower than analysts' expectations of 10.8%. Coupled with a slight contraction in profit margins and no increase in net profit, it failed to meet the strong expectations implied by Hermès' high valuation.
After the results for the second quarter were announced, Hermès' stock price fell, indicating that the financial report was more like confirming its “strongest fundamentals in the industry” rather than triggering a sharp increase in profit forecasts. In other words, it established a firmer lower limit for valuation, but it did not immediately “add a spark” to the rise in stock prices; real acceleration still requires a recovery in Chinese demand, a correction in Middle East business, easing of exchange rate headwinds, or the release of leather goods production capacity faster than expected.
Hermes and Coca Cola do share a brand moat, pricing power, strong cash flow, and extremely low balance sheet risk, which is rare in the world. They may also benefit from capital rebalancing from high leverage, high capital expenses, and high-momentum AI hardware computing power transactions to high-quality assets. On July 28, the Philadelphia Semiconductor Index fell by about 4.5%, South Korea's KOSPI plummeted 10.84%, and Samsung Electronics and SK Hynix fell about 13% and 15% respectively; during the same period, the US essential consumer sector rose 2.4%, and Coca Cola rose 5%, driven by an increase in performance and guidance. This indicates that the market is shifting from “capital expenditure scale” to “current cash flow and profit certainty.”
In the first half of 2026, Hermes' adjusted free cash flow increased 18% from 1,847 billion euros to 2,182 billion euros, and adjusted net cash reached 12.926 billion euros, up from 10.723 billion euros in the same period last year, indicating that its growth is still based on strong cash conversion rates and a balance sheet with almost no financing pressure. Management also maintains the goal of achieving “ambitious” revenue growth at a fixed exchange rate over the medium term.
Hermes' strength at the product level is very concentrated in core categories where the brand is truly scarce. Sales of leather goods and harnesses increased 9.8% at a fixed exchange rate in the first half of the year, with a further increase of 10.2% in the second quarter; silk and textiles grew 9.7% in the first half of the year and accelerated to 12.2% in the second quarter; ready-to-wear and accessories grew 3.6% in the second quarter, and watches also changed from a 3.7% decline in the first quarter to a 4.4% increase in the second quarter. New handbags such as Cliquetis, Kelly Hobo, and Double Longe are in high demand, while Kelly bags, birkin bags, and scarves are not driven by discounts or mass traffic, but benefit from strict supply controls, direct management channels, long-term waitlists, collections and identity attributes, and the low sensitivity of ultra-high net worth customers to inflation and short-term economic fluctuations.
But Hermès cannot be completely equated with Coca-Cola-style defensive stocks. Coca Cola is an essential consumer product with high demand frequency and low economic sensitivity; Hermès is still an optional consumer and luxury item in the industry classification, which is more affected by wealth effects, travel traffic, Chinese demand, and exchange rates. A more accurate position is: Hermes is a “scarce consumer alpha with high quality, low relative momentum, and plenty of net cash”. It has quasi-defensive attributes, but it is not a traditional low beta defensive asset. Its stock price still fell by about 20% during the year, which indeed lags far behind previous AI technology winners, providing low congestion for rebalancing funds; however, the decline after this financial report also shows that capital will not indiscriminately buy all classic brands — only when the fundamentals are realized more than high valuation expectations will “classics never fade” truly transform from brand narrative to continuous excess revenue.