Hermès leather goods remain strong as entry-level demand weakens: Bernstein cuts target price to €1480
Leather goods revenue maintained double-digit growth in the third quarter, but weaker Chinese footfall weighed on accessories, footwear and watches. Bernstein believes a fourth-quarter improvement will not be enough to reverse pressure on the brand and has lowered its valuation multiple; its Outperform rating rests on the company's self-help measures in 2027.
Original source：BernsteinFirst published on Unhidea：Original source date：
Key takeaway
Hermès' weakness lies in the breadth of demand beyond leather goods. Bernstein has therefore lowered its valuation and is placing its hopes for improvement on the effects of customer engagement and product innovation in 2027.
Leather goods are still selling well. Why do analysts believe the brand is under pressure?
Hermès' leather goods and saddlery revenue rose 10.8% year on year at constant exchange rates in the third quarter of 2026, above the 10.2% recorded in the first nine months. Management said all leather goods produced could be sold, and that the acceleration in the quarter was related to the timing of deliveries and product appeal. Full-year production capacity is expected to increase by approximately 6%.
Weakness was concentrated in categories more dependent on sales volumes: ready-to-wear and accessories revenue fell 2% year on year at constant exchange rates in the third quarter, while watches fell 6%. Silk and textiles grew 1.4%, below the 7% recorded in the first nine months. Ready-to-wear itself continued to grow; the drag on ready-to-wear and accessories came mainly from Greater China, particularly fashion accessories and footwear.
Bernstein concludes that consumers who aspire to buy luxury goods but whose spending is more sensitive to confidence are pulling back. Chinese consumer sentiment, the war in the Middle East and renewed competition from Chanel are together creating pressure. Strong demand for classic handbags has yet to bring about a simultaneous recovery in other categories.
Why does a fourth-quarter improvement not directly imply a broad recovery?
Greater China was flat over the first three quarters, with slight growth at the end of the first half and a moderate slowdown in the third quarter. Management attributed the weakness primarily to lower footfall rather than a decline in the average transaction value; higher sales value contributed by leather goods and jewellery partly offset the impact of footfall.
Short-term trends have shown signs of stabilising: in October, regions maintained their levels at the end of the third quarter, while China did not deteriorate further compared with 8–September. After weakness in August and early September, the United States returned to its operating level at the start of the year; France also improved in September and early October.
Bernstein expects fourth-quarter growth to improve from the third quarter, benefiting mainly from increased leather goods supply and trends within the quarter in markets outside China. However, the firm still expects underlying pressures to continue into 2027 and therefore does not regard the short-term improvement as a full recovery in demand for the brand.
Which customers must the self-help measures win back, and why is innovation at higher price points also needed?
The company is adjusting its online product displays to bring them closer to actual inventory and centrally managing relationships with top clients globally; it is also pursuing a value strategy in footwear and menswear. Bernstein believes these adjustments are currently focused more on re-engaging prospective Chinese luxury consumers who have pulled back, with some effects expected to emerge in the second half of 2027.
The firm sees greater opportunity in extending leather goods into higher price points: high-end clients are more resilient, but many already own several Birkin and Kelly bags. Selling more products to a smaller group of ultra-wealthy clients requires new designs that give them a reason to buy.
Bernstein would like to see new bags priced above the classic models. If successful, they could both ease concerns about utilisation of new capacity and potentially strengthen the brand's appeal across other categories and price points. This reasoning depends on high-end innovation winning the approval of top clients while demand for classic handbags remains solid.
Earnings forecasts were cut only slightly. Why was the target price cut by more?
Bernstein lowered its earnings per share forecasts for 2026 and 2027 by approximately 1% and 1.5%, respectively, to €43.32 and €46.35. Its model shows the operating margin falling from the actual 41.1% in 2025 to 39.8% in 2026 and 39.5% in 2027, indicating that profitability remains under pressure as revenue returns to growth.
The target price was cut from €1750 to €1480, mainly because of a valuation adjustment: the target price-to-earnings multiple relative to the MSCI Europe Index was reduced from 2.6 times to 2.3 times, corresponding to a price-to-earnings ratio of 28.5 times on the NTM+1 earnings basis used in the report.
The firm maintains its Outperform rating based on the potential effects of the 2027 self-help measures, but also believes earnings expectations for 2027 could still be revised down. The rating retains room for improvement, while the target price already reflects a lower valuation premium.
