Hermès has been hit by a decline in demand in China. What should investors do with their shares after a 40% drop?

Hermès, the maker of Birkin bags, was unable to increase sales in the third quarter in the region that includes China. This indicates that the luxury giant is not immune to spending cuts by Chinese consumers, according to Bloomberg. This year could be the worst for Hermès investors since 1993, when the company went public—since January, its stock has fallen 40%.

Hermès’ revenue in the Asia-Pacific region, excluding Japan—which is the luxury group’s largest market—remained virtually unchanged in the third quarter, excluding the impact of exchange rates. Analysts, meanwhile, had expected growth of 1.55%, according to Bloomberg. This region accounts for about 42% of Hermès’ total revenue.

"The macroeconomic environment in China remains challenging: the crisis in the real estate market and problems in the financial markets are exacerbated by the authorities' recent decision to tax overseas capital, which is hitting the wealthiest clients," said Chief Financial Officer Eric du Algoye during a conference call following the release of the financial results.

Hermès management noted that the apparel, watch, and footwear categories were hit hardest in China amid a decline in store foot traffic. Nevertheless, Éric du Algoy stated that the company remains confident in the country’s potential “in the medium and long term,” according to the Financial Times.

Hermès' total sales rose 4.3% during the reporting period, while analysts had expected a 5.2% increase, the newspaper reports.

Sales of highly sought-after handbags and leather goods—which account for the largest share of the fashion house’s revenue—increased by 10.8% in the third quarter. Meanwhile, revenue from apparel and accessories—the second-largest division—declined by 2% during the same period. The watch division declined by 6% in the third quarter, while revenue from silk and textiles increased by only 1.4%.

According to du Algoye, weak sales of prêt-à-porter clothing in the third quarter “do not reflect the overall trend,” which was positive outside of China. He added that the debut collections by new menswear designer Grace Wales Bonner and the launch of a haute couture line in 2027 are expected to create synergies for this division.

What about the stocks?

Hermès shares fell 7% during trading in Paris on October 22. Since the beginning of the year, they have dropped 40%, putting them on track for their worst annual performance since the company went public in 1993, Bloomberg notes.

Shares of other luxury brands have also declined this year: LVMH’s stock price fell by 40.6%, while Kering, the owner of Gucci, lost 30% of its market value. Richemont’s market capitalization, which has outperformed the market thanks to demand for jewelry from Cartier and Van Cleef & Arpels, rose by just 0.5%.

“These results appear to foreshadow a very difficult day,” said Jefferies analyst James Grigini. “Sales in the leather goods division picked up again, but the underperformance of other categories worsened to an unprecedented level,” the FT quoted him as saying.

In early October, analysts expressed concern about Hermès’ ability to maintain its ultra-exclusive status, pointing to the increased availability of Birkin and Kelly bags both in stores and on secondhand marketplaces.

The most common recommendation for Hermès stock is to hold: 11 out of 23 analysts covering the fashion house have issued this recommendation. Two analysts advise selling the stock.

Hermès has outperformed its competitors amid a multi-year slump in demand for luxury goods thanks to its loyal and affluent customer base, the FT notes. However, its resilience is being put to the test amid a volatile geopolitical environment. Investors have also begun to question the company’s previously sky-high valuation and the growing gap between demand for its leather goods and other product lines, the publication points out.

LVMH, the industry's most valuable company, reported last week that sales rose by just 1% in the third quarter due to weak demand, which foreshadows a difficult earnings season for the entire luxury goods sector, the newspaper notes.

This article was AI-translated and verified by a human editor