Hermes International (HESAY, Financial) delivered its quarterly information report for its 2016 sales early this month. The $45 billion luxury goods retailer delivered 7.5% sales growth to 5.2 billion euros ($5.49 billion). Hermes experienced positive sales growth in both its Europe and Asia businesses.
Hermes did not provide net income figures for the recent fiscal year operations and is expected to report its complete fiscal 2016 results on March 22.
Shares of the luxury handbag maker closed flat despite trading three times its prior-day volume.
Earnings performance
Meanwhile, Hermes reported its interim results back in June. The retailer reported 6% sales growth to 2.44 billion euros and 13% profit growth to 545.4 million euros.
Valuations
Hermes shares exhibited gross premium in valuations. According to Reuters, Hermes had a trailing price-earnings (P/E) ratio of 41.3 times (industry value of 34.9), price-book (P/B) ratio of 11 times (industry value of 3.4) and price-sales (P/S) ratio of 8.6 times (industry value of 3.4).
Hermes also had a trailing dividend yield of 0.87% and 34% payout ratio along with a 0.4% share buyback ratio, according to GuruFocus data.
Total returns
Hermes ADR shares trailed the broader Standard & Poor's 500 index in both short- and long-term time frames. According to Morningstar, Hermes had one- and five-year total returns of 22.3% and 4.2% while the S&P 500 had 24.7% and 14%.
(Annual Report)
Hermes
Hermès International SA, Hermes of Paris, is a French high fashion luxury goods manufacturer established in 1837 – 179 years ago.
As per its recent annual filing in 2015, Hermes had 307 stores worldwide while raking in 4.84 billion euros in sales – this compares to 317 stores in 2010 with 2.4 billion euros in sales. Hermes had 45% or 138 of its stores in Asia, 119 stores in Europe and 50 stores in the Americas – including the U.S.
In fiscal 2016, Hermes derived 48% or 2.5 billion euros of its sales from Asia, 32% from Europe and 18% from the Americas.
On a five-year average, Hermes had sales and profit growth and profit margin averages of 15.1%, 17.6% and 20.8%.
Cash, debt and book value
As of June, Hermes had 1.53 billion euros in cash and cash equivalents and 37.4 million euros in debt with a debt-equity ratio of 0.01. The luxury goods maker just had 3.2% of its 5.25 billion euros in assets in goodwill and intangibles in the period while having a book value of 3.9 billion euros compared to 3.23 billion the year earlier period.
Cash flow
(Interim Report, Hermes)
For its fiscal 2016 interim, Hermes grew its cash flow from operations by 28.6% to 570.1 million euros. As observed, Hermes’ profit growth contributed to the rise in cash flow along with a marked increase in currency gains on fair value adjustments.
Capital expenditures, including the purchase of intangible assets, were 107.5 million euros leaving Hermes with 462.6 million euros in free cash flow compared to 342.9 million free cash flow the year prior.
In the interim, Hermes allocated 89% or 413 million euros of its free cash flow in dividends and share buybacks.
(Interim Report and Morningstar Data, Hermes)
On average, Hermes allocated 58% of its free cash flow in shareholder payouts – dividends and share buybacks – in the past three fiscal years.
In the interim, Hermes did not take any debt and paid 6.4 million euros instead.
Conclusion
Hermes demonstrated resiliency despite the ongoing retail industry turmoil being felt in most retailers (A) (B).
The luxury bag maker exhibited admirable balance sheet strength and disciplined free cash flow payouts in recent years.
As observed, there could be minimal affectation in terms of Brexit as Hermes only had 10 of its total store count in the country, compared to 33 and 17 in total store count in France and Germany.
Historical earnings multiple and profit growth averages applied with a 20% margin indicated a value of $33 per Hermes ADR shares, or 31 times trailing earnings per share.
In summary, Hermes ADR shares are a hold.
Disclosure: I do not have shares in the company mentioned.
Start a free seven-day trial of Premium Membership to GuruFocus.
