TIP852: Hermès and LVMH Stock: Time to Buy Luxury? w/ Daniel Mahncke & Shawn O'Malley

Episode Summary

Executive Summary: The episode reassesses Hermès (MS) and LVMH after sharp valuation declines and a broad luxury slowdown. The hosts argue the sector is being hit by weaker aspirational demand, China’s property-driven downturn, and softer Middle East tourism, while top-tier brands remain resilient. They conclude MS is the stronger long-term business, but neither stock offers enough margin of safety yet.

Main Topics: Luxury sector slowdown and demand reset (Priority: 5/5): The hosts frame luxury as no longer a stable, non-cyclical category, citing weakening sales, fewer customers, and the fading of the pandemic-era spending boom. Aspirational buyers vs. ultra-wealthy customers (Priority: 5/5): A major theme is the split between aspirational buyers (large volume, price-sensitive) and top-tier buyers (smaller in number, more resilient), with the former driving much of the slowdown. Brand comparison: Hermès vs. LVMH (Priority: 5/5): Hermès is presented as more focused, more exclusive, and more durable, while LVMH is broader but more exposed to aspirational demand and weaker segments like fashion/leather and cognac. China and macro pressures (Priority: 5/5): China’s property slump, savings behavior, deflationary environment, and policy optics are identified as the biggest drag on luxury demand, especially for brands with large China exposure. Middle East, U.S., and currency effects (Priority: 4/5): The Middle East is temporarily disrupted and the U.S. is carrying the industry, but FX headwinds and region-specific shocks are distorting reported results. Segment-level winners and losers (Priority: 4/5): Jewelry and selective retail are relatively strong, while fashion/leather goods and cognac are under pressure; spirits face secular shifts, especially among younger consumers. Valuation and investment decision (Priority: 5/5): Despite cheaper prices than before, the hosts still do not see sufficient downside protection or a compelling entry point, especially for LVMH, and prefer to wait for deeper distress.

Key Arguments: Luxury demand has become more cyclical because aspirational buyers, who make up a large share of the market, are the first to cut spending when the economy weakens. Hermès is better positioned than LVMH because it sells more to the top end of the market, relies less on aspirational buyers, and maintains stronger exclusivity. LVMH’s apparent diversification is misleading because fashion and leather goods still generate most of its profit, making the company highly exposed to one segment. China’s real estate downturn is the key macro problem because Chinese consumers feel poorer, save more, and spend less on luxury goods. The Middle East is a meaningful near-term headwind because luxury spending was expected to offset China, but travel/tourism disruptions reduced purchases. Jewelry is comparatively resilient because it appeals to the top tier and benefits from high gold and silver prices, while fashion is more vulnerable to price fatigue. Cognac is structurally challenged by changing alcohol preferences, with younger consumers drinking less and choosing tequila or canned cocktails instead. Despite the downturn, both brands likely survive and may recover eventually, but the hosts believe better buying opportunities may come later at lower valuations and worse sentiment.

Data Points: Personal luxury goods market size: $360 billion - Estimated size of the market relevant to LVMH and Hermès Total luxury market size: $1.44 trillion - All luxury categories including cars, hotels, yachts, dining, and personal goods Luxury customers lost since 2022: ~70 million - Customer base fell from about 400 million to 330-340 million Aspirational buyer annual spending: $1,500 to $5,000 - Typical yearly spending range for lower-tier luxury consumers Top-tier luxury spenders: <1 million people worldwide - Consumers spending more than €50,000 annually on luxury goods Top-tier spending share: ~20% of luxury spending - Smallest customer cohort accounts for a disproportionate share of spending Aspirational buyer growth: ~1% per year - Long-run growth of the aspirational cohort has been very slow MS sales growth in 2021: 40% - Peak growth during the post-pandemic luxury boom MS sales growth in last 12 months: <3% - Near two-decade low growth rate LVMH fashion/leather revenue trend: 7 consecutive quarters of negative organic growth - From Q3 2024 through Q1 this year LVMH profit decline since end-2023: 25% - Drop in operating profits during the slowdown LVMH fashion/leather margin: 42% in 2021 to 34% in H1 this year - Shows operating leverage reversing in the core segment China share of global luxury spending at peak: ~1/3 - Chinese consumers represented about a third of worldwide luxury spending from 2017 to 2021 China share of global luxury spending now: <1/5 - Combined domestic and tourist spending has fallen materially Middle East share of luxury spending: ~5% to 10% - Region is important but not dominant globally LVMH Middle East sales exposure: ~4% - Share of sales tied to the region Richmont Middle East sales exposure: ~9% - Highest exposure among major luxury groups LVMH revenue mix Europe/U.S./Asia excl. Japan/Japan/other: ~25% / ~25% / 30% / 8% / 13% - Illustrates geographic diversification LVMH profit mix from fashion/leather: ~75% - Core profit driver despite conglomerate structure LVMH fashion/leather contribution from Louis Vuitton: ~50% of segment profit - Shows concentrated reliance on one brand Hermès geographic concentration in Asia excl. Japan: >40% of sales - Highlights exposure to Asia despite brand strength Hennessy U.S. retailer sales: 5 million cases in 2020 to <3 million last year - Illustrates decline in cognac demand U.S. social drinking approval: 54% - Lowest Gallup reading ever recorded for enjoying alcohol socially U.S. spirits revenue: $36 billion - Down 2% last year amid broad category weakness LVMH operating profit impact from FX: €700 million in H1; expected €1 billion full-year - Currency strength against mostly non-Euro revenues Hermès expected return at ~€1,300/share: 12% to 13% - Base-case return estimate from the discussion LVMH expected return: ~11% - Below the hosts’ 12% hurdle rate LVMH valuation used in model: ~20x earnings - Approximate trading/valuation multiple in the base case Hermès valuation used in model: ~32x earnings - Still elevated despite a drop from prior highs

Pivotal Quotes: "In business, I think the most important thing is to position yourself for the long term and not to be impatient, which I am by nature, and I have to control myself." — Bernard Arnault: Closing quote reinforcing the long-term mindset needed in luxury investing "You suffer from success." — Daniel Manka: Describing how success in China can attract policy, perception, and macro risks "The better you do, the more you get into the crosshairs of the CCP." — Sean O'Malley: Explaining why strong luxury demand in China can become a liability

Implications: Luxury remains high-quality but not obviously cheap. Investors should expect a longer cycle, watch China/Middle East recovery, and prefer the most exclusive brands. MS looks structurally better than LVMH, but both may need more pain before offering true value.