High-quality and scarce consumer goods set the investment tone after the AI slump! Hermès maintains its scarcity premium with a 41% profit margin and €12.9 billion in cash

According to Zhitong Finance APP, the European luxury giant Hermès recently announced quarterly sales growth in line with market expectations. Amid sluggish global demand for luxury goods, the iconic Birkin bag maker Hermès has significantly outperformed its peers in both stock price and fundamental performance. However, critical Asian markets such as China have failed to achieve a further recovery, dragging down Hermès' share price performance.

In a statement released on Wednesday local time, Hermès stated that second-quarter revenue, calculated at constant exchange rates, grew by 6.7% to approximately €4.1 billion (about $4.7 billion). This growth exceeded analysts' consensus forecast of 6.51%.

The Jefferies analyst team led by James Grzinic wrote in a report: "The persistent lack of growth momentum in Asian markets such as China" remains a concern. Hermès shares fell as much as 5.3% in early Paris trading. As of Wednesday, the stock had fallen about 20% year-to-date.

As the Korean stock market, dubbed the "AI computing power weather vane," has often experienced both upward and downward circuit breakers, and with the Philadelphia Semiconductor Index entering a bear market plus the cooling of global AI semiconductor and other AI computing momentum trading, funds are shifting from high-leverage, high-beta computing stocks to low-volatility, high-quality stocks. The market's leading forces are expected to expand from semiconductors to cash-rich consumer/cyclical/healthcare/big finance and other defensive recovery assets with potential for the next round of alpha.

Strategist teams from top Wall Street firms such as Citi, Morgan Stanley, and Jefferies believe that violent fluctuations in AI computing-related tech stocks will continue. Investors should now rebalance portfolios that have become overly concentrated in highly-valued AI-related tech stocks—meaning "the AI main line has not cooled, and the bull market will start to rotate into non-AI tech sectors."

Hermès and Coca-Cola do share brand moats, pricing power, strong cash flow, and globally rare ultra-low balance sheet risks, and both may benefit from a rebalancing of funds from high-leverage, high-capex, high-momentum AI hardware computing to high-quality assets. However, Hermès cannot be fully equated with a Coca-Cola-style defensive stock + high-quality cash flow alpha. Coca-Cola belongs to high-frequency, low economic sensitivity essential consumption; Hermès, in industry classification, is still discretionary and luxury, more affected by wealth effects, tourism traffic, Chinese demand, and exchange rates.

Holding Firm to Brand Moat: Hermès Navigates the Luxury Winter with Artisanship, Leather, and Controlled Supply

The luxury industry is being hit from multiple fronts: consumers in Asian countries like China are cutting back on spending amid high energy prices caused by Middle East geopolitical tensions, inflationary pressures are making consumers more cautious, and the Middle East war has damaged the hot demand at major malls in Dubai and affected tourist flow to Europe. Hermès Executive Chairman Axel Dumas said in a conference call with analysts that the Chinese market, once a key growth engine for the industry, has not yet overcome recent challenges.

At the earnings conference, he said: "I see the Chinese market stabilizing, but I haven't seen a fundamental recovery yet." He added that the company is still growing in China, but at a slower rate than the strong growth in recent years.

Compared to many competitors, Hermès has greater exposure to the Chinese market. The broader Asian region, including China, contributed about 43% of the company's revenue in the first half. By comparison, Asia (excluding Japan) accounted for 29% of LVMH Group (LV’s parent company) revenue in the same period.

In the past three months, Hermès' resilient growth was mainly led by the Americas, which reported a 13.7% increase. France, a major global tourist destination, grew 6.2%. Regions including the Middle East, though still negative, showed improvement compared to the previous quarter. The company said that this region "has continued to show remarkable resilience amidst prolonged geopolitical instability."

For the first half of the year, Hermès’ 2026 H1 revenue rose from €8.034 billion to €8.163 billion, up 6.1% at constant exchange rates and 1.6% at actual exchange rates; recurring operating profit rose slightly from €3.327 billion to €3.351 billion, with a recurring operating margin still at a high 41.0%, down just 0.4 percentage points from 41.4% a year earlier; net profit was €2.238 billion, essentially flat with €2.246 billion in the same period last year.

Middle East conflicts and a reduction in aspirational high-end consumer purchases have hit the entire luxury industry. However, with long waiting lists for its products, especially the Kelly and Birkin bags, and by stimulating demand and maintaining high prices through limiting supplies of popular items—Hermès’ unique "ultra-luxury business model"—Hermès has demonstrated strong demand and resilient performance growth.

Before Hermès released earnings, sector leaders LVMH, Burberry Group Plc, and Moncler mostly reported disappointing results. These brands have greater exposure to fashion and leather goods. However, Richemont achieved strong results driven by jewelry brands like Cartier and Van Cleef & Arpels, indicating that consumers are still willing to spend heavily on luxurious and bespoke luxury goods, but choices are becoming more cautious.

Some analysts question whether Hermès needs to take tough but necessary steps to cut leather goods production to maintain brand value.

Responding to this, Dumas told analysts at the earnings conference that Hermès’ production capacity is naturally constrained by the scarcity of skilled craftsmen and the limited supply of high-quality leather, while the leather supply chain is also becoming more industrialized.

He stressed: "If in the short term we can't find enough high-quality and ultra-luxury customized versions of leather, I just won't produce."

This European luxury giant is advancing as planned to open a large leather goods manufacturing plant in France every year through 2030. Dumas noted that after this, different regions have already approached him, hoping the company can set up local factories and bring massive employment opportunities.

The Wave of Fund Rebalancing Revalues Global High-Quality + Scarce Consumption Alpha

For Hermès' stock price and valuation, this is a report with very high basic quality, but not enough to be a "material positive surprise" for the share price. Second-quarter constant-currency revenue grew 6.7%, basically in line with market expectations; leather goods, making up nearly half the revenue, grew about 10%, slightly below analysts' expectation of 10.8%. With a slight margin contraction and net income showing no growth, results fell short of the strong outperformance implied by Hermès’ high valuation.

After the Q2 results were announced, Hermès' share price actually fell, suggesting that the report served more to confirm its "strongest fundamentals in the industry" rather than to be a catalyst for substantial upward earnings revisions. In other words, it has set a firmer floor for valuations but did not immediately "fire up" the share price; real acceleration still requires a recovery in Chinese demand, positive growth in the Middle East, relief from exchange rate headwinds, or faster-than-expected release of leather goods capacity.

Hermès and Coca-Cola indeed share brand moat, pricing power, strong cash flow, and globally rare ultra-low balance sheet risk and may also benefit from a rebalancing from high-leverage, high-capex, high-momentum AI hardware computing trades to high-quality assets. On July 28, the Philadelphia Semiconductor Index fell about 4.5%, Korea's KOSPI plunged 10.84%, with Samsung Electronics and SK Hynix down roughly 13% and 15% respectively; meanwhile, the US essential consumer sector rose 2.4%, and Coca-Cola rose 5% after an earnings and guidance upgrade. This indicates the market is shifting from "capital expenditure scale" to "current cash flow and earnings certainty."

In the first half of 2026, Hermès’ adjusted free cash flow increased 18% from €1.847 billion to €2.182 billion, with adjusted net cash reaching €12.926 billion, up from €10.723 billion a year earlier, demonstrating growth still built on a very strong cash conversion rate and an almost pressure-free balance sheet. Management also maintained an ambitious goal for medium-term revenue growth at constant exchange rates.

Hermès’ strength at the product level is highly concentrated in core categories with true brand scarcity. In the first half, leather goods and saddlery sales grew 9.8% at constant exchange rates, and rose another 10.2% in Q2; silk and textiles rose 9.7% in H1 and accelerated to 12.2% in Q2; ready-to-wear and accessories grew 3.6% in Q2, and watches, after a 3.7% decline in Q1, grew 4.4% in Q2. New handbag models like Cliquetis, Kelly Hobo, and Double Longe are in high demand, while the Kelly, Birkin, and scarves are not driven by discounts or mass traffic but benefit from strictly controlled supply, direct sales channels, long waiting lists, collection and status properties, and ultra-high-net-worth clients’ low sensitivity to inflation and short-term economic fluctuations.

But Hermès cannot be equated to a Coca-Cola-style defensive stock. Coca-Cola is essential consumption with high-frequency demand and low economic sensitivity; Hermès is classified as discretionary and luxury, with higher exposure to wealth effects, tourism, China demand, and FX. A more accurate positioning: Hermès is "high quality, low relative momentum, cash-rich scarce consumption alpha," with quasi-defensive attributes but not a traditional low-beta defensive asset. Its stock is still down around 20% year-to-date, lagging far behind previous AI tech winners, giving rebalancing funds a low-crowding entry point; but the post-earnings drop also indicates that funds will not indiscriminately buy up all classic brands—only when fundamentals deliver more than high valuation expectations will "classics never fade" truly turn from brand narrative into sustained excess returns.