Are Cartier Love bracelets about to replace the Hermès Birkin bag as the product that drives the best shareholder returns in the luxury-goods industry?
Event Context
Hermès still has an edge. Its Birkin handbags continue to sell at a premium to retail prices in the second hand market. This suggests that investors’ worries that the brand’s top product is losing its appeal are overblown.
Cartier’s business is booming. The brand is a hit with Gen Z. Its Love bracelets are all over social-media feeds, and Taylor Swift wore Cartier jewels at her recent wedding to pro football star Travis Kelce.
Although Richemont doesn’t break out individual brands’ sales, Morgan Stanley estimates Cartier has doubled in size since 2019 and generated 11.2 billion euros in sales during Richemont’s last full financial year (equivalent to about $12.8 billion).
Demand shows no signs of slowing. At its quarterly sales update last week, Richemont said its “jewelry maisons” grew 24% over the three months through June. This makes the division one of the fastest-growing businesses in the luxury-goods industry.
Cartier drives the lion’s share of sales at the jewelry maisons unit. Richemont’s other jewelry brands, Van Cleef & Arpels and Buccellati, are also growing quickly, but are smaller brands.
And it is well positioned for a K-shaped economy. Special, one-time pieces can cost $10 million or more—prices that even the most expensive handbag brands such as Hermès can only dream about.
Even though Cartier has doubled in size in recent years, the jewelry division’s operating margin has flatlined at around 30%.
Player Focus
Hermès’ performance has been shakier. Its stock fell when war broke out with Iran, as happened with all luxury companies. Then the company released a weak set of first-quarter results in April. The shares are down a fifth so far this year.
The all-important leather-goods division, where sales of Birkins and other handbags are reported, grew by 9% compared with a year ago. That sounds healthy, but investors were spooked by low demand for Hermès’ clothing, watches and perfumes.
Hermès uses a technique known as “bundling” in luxury circles. Demand for the Birkin is normally so strong that the brand’s sales assistants are able to make access to the bags conditional on buying other stuff. Although the company never spells it out explicitly, Birkin collectors say that shoppers who buy $100,000 sofas and $20,000 watches get offered the bags first.
Team Analysis
The technique helps drive sales across all parts of the store and keeps growth steady. The business model explains why Hermès stock has traded at a huge premium to rivals for years. If the Birkin is losing its shine, Hermès sales will become more volatile and hurt the stock’s appeal.
Two dynamics that are unique to the jewelry business might limit the ability to lift margins higher. As Cartier has a lot of shoppers who only buy from the brand once or twice in a lifetime, the company needs to constantly refresh its base of customers. This means the brand can’t raise prices too high for risk of sidelining middle-class shoppers.
Cartier also has to spend heavily on advertising to ensure the brand is at the top of consumers’ minds when celebrating a special occasion.
Richemont’s stock relies heavily on its jewelry brands. The division is delivering 112% of the company’s overall operating profit. In other words, jewelry is offsetting losses at some of Richemont’s luxury watch and fashion brands.
On balance, the odds that Hermès regains its footing look better than the likelihood that Richemont’s stock can go much higher.
Write to Carol Ryan at [email protected]
Match Outlook
Doubts are starting to creep in. Hermès shares trade at 35 times expected earnings, down from 45 times earlier this year. However, there are reassuring signs in the resale market.
True, Richemont’s top line is growing faster at the moment, but the good news looks priced in. The stock changes hands for 28 times expected earnings, which is a fifth above the company’s three-year average.
source
Demand for Cartier’s most expensive jewels is strong now that wealthy households are getting even richer from surging stock markets. But ultra-pricey jewelry only generates 15% to 25% of Cartier’s sales according to Bernstein luxury analyst, Luca Solca.
The real engine of the business is selling products such as Love bracelets in huge volumes to shoppers further down the income ladder. Cartier’s typical customer might spend $5,000 or $10,000 on a piece of jewelry to mark a milestone birthday or a college graduation.
Cartier is also benefiting from a growing perception that luxury jewelry offers better value for money than designer purses, after many handbag brands increased their prices too quickly during the pandemic.
According to Bernstein’s latest secondhand pricing tracker, the premium paid for Birkin and Kelly handbags at Sotheby’s and Christie’s auctions increased during the second quarter. On average, bidders paid 45% above retail prices for the bags at auction, up from 25% in the first quarter.
