Rating Downgrade and Price Target Revision
RBC Capital Markets downgraded Hermes to Sector Perform from Outperform and cut its price target to €1,700 from €1,900, citing a narrowing growth premium relative to the luxury sector.
Growth Premium and Revenue Outlook
RBC estimates the revenue and EBIT compound annual growth rate (CAGR) differential versus peers will be 2 percentage points from 2027 onward, down sharply from an 8‑point gap in 2025. The analysts attribute the convergence to Hermes’ increasing reliance on its Leather Goods division.
Leather Goods Contribution
The brokerage forecasts Leather Goods will account for 63 % of group revenue growth between fiscal 2025 and 2030, up from 40 % in the preceding five‑year period. Leather Goods revenue growth is expected to be roughly 9‑10 % annually from fiscal 2027 onward, assuming volume growth remains at a steady 6 % per year.
Pricing Dynamics
During the post‑COVID inflationary period, price contribution in Leather Goods rose to 6‑9 % per year; RBC expects this to moderate to 3‑4 % per year from fiscal 2027, based on management commentary that price increases in 2027 will be “slightly lower than this year.”
Profitability and Return Metrics
RBC projects the EBIT margin to remain largely flat around 40 % through fiscal 2029, which, while sector‑leading in absolute terms, offers little scope for further expansion. Incremental return on invested capital (ROIC) is forecast to be slightly negative for fiscal 2026‑2029, diverging from the broader luxury sector where margin recovery should improve ROIC.
Valuation and Comparative Preference
Hermes is currently valued at approximately 32 times fiscal 2027 earnings, a level that RBC believes already incorporates most of the growth dynamics, rendering the risk‑reward profile more balanced. The analysts indicated a preference for other luxury stocks with either stronger valuation support (LVMH, Burberry) or higher earnings growth (Richemont).
Revised Financial Estimates
RBC trimmed its fiscal 2027‑2028 revenue estimates by 1 % and its earnings‑per‑share (EPS) estimates by 3‑4 %, reflecting an assumption of a higher effective tax rate in the later years.