Hermès Handbags Pass an Early Covid Test

Premiums paid for the French brand’s Birkin and Kelly bags remained high at the latest Christie’s auction, but don’t necessarily signal healthy luxury demand more generally.

By guest author Carol Ryan from Wall Street Journal

Even with nowhere to flaunt it, wealthy shoppers have paid over the odds for a secondhand Birkin handbag during Covid-19 lockdowns. Strong auction results for the Hermès brand aren’t a great indicator of the wider health of the luxury sector, though.

At a Christie’s online sale of used handbags this week, Hermès Kelly and Birkin models sold at an 80 % premium to the midpoint of their estimates on average. That’s about the same level as a pre-virus auction held in November 2019. However, the total tally was smaller than previous auctions, which may reflect more conservative estimates or that the most coveted bags were held back for a later date.

The secondhand luxury market, whether at auction or consignment websites such as The Real Real, is becoming an important measure of brand heat—even if the labels themselves don’t profit from it. Hermès is the only company whose handbags are more expensive to buy used than new. Supply of its two most popular bags, the Birkin and Kelly, is tightly restricted in boutiques. That forces shoppers into a thriving resale market where they can expect to pay 50 % to 100 % premiums over store prices for rare colours.

The strength of demand for used Hermès bags even during the pandemic suggests sales of new ones will bounce back once stores reopen. That goes some way to justifying the company’s remarkable share-price performance. It is the only luxury stock that has risen this year and now trades for 54 times projected earnings, above a 10-year average of 36 times.

That eye-watering multiple partly reflects depressed profits as store closures choke off sales. Analysts expect total revenue to drop 30% this quarter but Hermès will report the actual number in July.

Signs of promising underlying demand at Christie’s should be caveated, though. The Birkin and Kelly bags only contribute around 25 % to 30 % of overall sales according to Bernstein estimates. The showing of other Hermès goods such as clothing, silk scarfs and jewelry may be softer.

Hermès does tend to be more resilient than rivals in economic downturns. The likes of Burberry or Prada are unlikely to benefit from the same level of pent-up demand as consumers return to stores. Revenue in the luxury sector overall will probably fall 35% in 2020, consultants at Bain estimate.

Demand for the French company’s bags looks healthy, but shouldn’t be read as a sign of Covid-19 immunity at other names.