To The Moon

Yesterday, luxury stocks fell sharply, with $Hermes International SA(HESAF)$ dropping over 5.8%, marking its largest single-day decline since April 7 last year!

Although $LVMH-Moet Hennessy Louis Vuitton(LVMHF)$ ’s decline was relatively modest at just 1.77%, it has fallen to recent lows and is now nearly halved from its historical peak!

$Compagnie Financiere Richemont AG(CFRHF)$ and $Kering SA(PPRUF)$ both fell by more than 4.5% yesterday.

The main driver behind the sharp decline in luxury stocks was the surge in oil prices triggered by Middle East tensions, which intensified market concerns over inflation, interest rates, as well as the outlook for tourism and discretionary spending.

In terms of revenue composition, the Middle East is not a major market for luxury goods, accounting for only about 4% of global sales:

Among them, Richemont has the highest exposure at around 9%, while LVMH is about 6% and Hermès only around 4%:

Despite the limitation of the revenue share, the timing coincides with Ramadan in the Middle East. Analysts expect luxury sales in the region to decline by about 10%. Combined with the impact of high oil prices on other regions, global sales are projected to fall by around 1.5%.

The market was already cautious about the luxury sector this year, with expected growth of only 4%. Now, with the added impact of the Middle East conflict, the outlook has worsened further.

Although the situation in the Middle East remains volatile, oil prices are still above $100, and the Fed has reduced the number of expected rate cuts this year, Trump’s TACO pattern suggests that if oil prices stay elevated for too long, domestic pressure will rise significantly. His recent statement opposing Israeli strikes on Iran’s energy facilities also indicates that the conflict is unlikely to drag on for an extended period.

If the conflict ends in a few weeks, the likelihood of a renewed inflation surge would be lower, and capital markets could see a recovery.

Most importantly, after a sharp pullback, Hermès’ previously elevated valuation has eased, with its latest P/E ratio falling to around 40x, now at a relatively low level over the past decade:

As early as 2022, I bought the dip in Hermès and fully exited in May 2023, achieving a 100% gain. My rationale for selling at the time was that Hermès was trading at an elevated valuation, with a P/E ratio as high as 60x. Given that luxury goods are not a high-growth industry, such a high valuation could become a headwind over time.

Looking at the subsequent performance, although Hermès rose as much as 50% above my exit price at one point, it has now fallen back below that level. From a long-term investment perspective, such an outcome is not particularly favorable.

This suggests that no matter how good a company is, it may not be worth holding at elevated valuations. Today, while the luxury sector faces headwinds, valuations are now on the investor’s side.

In terms of performance, Hermès reported revenue growth of 3.2% year over year in Q4 last year. While not particularly high, growth reached around 10% when excluding currency effects, which remains solid:

Historically, Hermès’ annual revenue declined only in 2003 and 2020, while maintaining positive growth in all other years:

The decline in 2003 was due to the SARS outbreak, while 2020 was impacted by the COVID-19 pandemic. During the 2008–2009 global financial crisis, Hermès’ revenue was not affected.

Behind this strong earnings resilience is Hermès’ unique position in the luxury industry. On one hand, its handcrafted production creates scarcity; on the other, its products see price increases year after year. In addition, its customer base consists of ultra-high-net-worth individuals rather than the mass affluent, giving it stronger resistance to economic fluctuations.

For example, after the U.S. imposed tariffs in 2025, Hermès directly raised prices by nearly 10%, and is expected to increase prices again by 5%–6% this year.

As a result, Hermès has been able to maintain exceptionally high profitability, with a gross margin of 71.1% and an operating margin of 41% in 2025. If not for France’s special windfall tax on large corporations last year, its net margin would have remained above 30%:

Currently, analysts expect Hermès to deliver a compound annual growth rate of around 10% through 2028, excluding currency effects.

Therefore, while Hermès may not see explosive growth like AI-related stocks, its earnings visibility is exceptionally strong. Investor returns are likely to come mainly from valuation swings, and with its P/E now down to around 40x—near recent lows—it is worth paying attention to.

I plan to build a position in tranches at 40x, 35x, and 30x P/E to average in and manage risks related to Middle East tensions and market liquidity.