RBC Capital Markets downgraded Hermes (LSE:RMS) to Sector Perform from Outperform and reduced its price target to €1,700 from €1,900, arguing that the superior growth profile behind the luxury group’s premium valuation is becoming less pronounced.
The brokerage expects Hermes’ revenue and EBIT compound annual growth rates to exceed those of its peers by around 2 percentage points from 2027 onwards. That compares with an estimated advantage of 8 percentage points in 2025.
“The growth premium that justified its valuation premium vs the sector is converging,” analysts led by Piral Dadhania said, highlighting the company’s growing dependence on Leather Goods as a source of expansion.
Leather Goods Expected to Drive Majority of Growth
RBC forecasts that Leather Goods will account for 63% of Hermes’ group revenue growth between fiscal 2025 and 2030, compared with 40% during the preceding five-year period.
The increasing contribution comes as growth across the wider business is expected to moderate. RBC noted that periods when Leather Goods have substantially outperformed Hermes’ other divisions have historically been associated with weaker cyclical demand.
That dynamic could leave competing luxury companies better positioned to benefit if demand across the broader sector recovers.
Pricing Contribution Set to Moderate
RBC also expects the contribution from price increases within Leather Goods to become less significant.
According to the analysts, the division has historically generated a consistent annual volume contribution of approximately 6%, while pricing contributed between 6% and 9% annually during the inflationary period following the Covid pandemic.
From fiscal 2027, RBC expects the pricing contribution to fall to between 3% and 4%. The forecast follows recent management comments indicating that 2027 price increases would be “slightly lower than [this year].”
Unless volumes accelerate, the brokerage expects Leather Goods revenue to grow by approximately 9% to 10% annually from fiscal 2027 onwards. That is broadly consistent with consensus forecasts but would represent a sequential slowdown.
EBIT Margin Seen Holding Near 40%
RBC expects Hermes’ EBIT margin to remain broadly unchanged at around 40% through fiscal 2029.
Although that level would continue to rank among the strongest margins in the luxury industry, analysts see limited scope for further expansion following the significant improvement achieved since the pandemic.
The brokerage also forecasts slightly negative incremental return on invested capital, or ROIC, between fiscal 2026 and 2029. That contrasts with expectations for parts of the wider luxury sector, where recovering margins could drive improving returns on capital.
Valuation Leaves Risk-Reward More Balanced
Hermes currently trades at approximately 32 times expected fiscal 2027 earnings, a valuation RBC believes already incorporates much of the company’s superior growth and profitability.
As a result, analysts described the risk/reward as “more balanced” at current levels.
Within the luxury sector, RBC said it favours companies offering stronger valuation support, including LVMH (EU:MC) and Burberry (LSE:BRBY), or businesses with stronger earnings growth prospects, such as Richemont (USOTC:CFRHF).
The brokerage also reduced its fiscal 2027 and 2028 revenue forecasts for Hermes by 1%, while cutting its earnings-per-share estimates by between 3% and 4%. The EPS revisions partly reflect RBC’s assumption of a higher tax rate in the later forecast years.
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