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

Luxury demand is more cyclical than its exclusive image suggests: aspirational buyers rely on paycheck income, and their pullback has weighed on sales as the economy and consumer confidence weaken. They spend roughly $1,500–$5,000 a year, mostly on entry-level goods, but represent about half of the market’s value. Their spending helped fuel the 2022–2024 surge, alongside COVID checks, strong markets, and accumulated savings. Broad luxury spending was about $1.44 trillion last year, flat year over year; personal luxury goods accounted for about $360 billion and have been shrinking by roughly $5–$6 billion annually since late 2023. The customer base fell from about 400 million in 2022 by roughly 70 million by 2025.

Hermès and LVMH face the slump from different positions. LVMH sales fell for two consecutive years, an unusual stretch, and returned to 2022 levels; its fashion and leather goods segment has posted seven consecutive quarters of negative organic growth. Hermès has rarely recorded an annual sales decline outside the pandemic, but growth slowed from 40% in 2021 to less than 3% over the last 12 months, its weakest rate in about two decades. Hermès relies on one brand, with bags generating almost half of revenue and Asia excluding Japan contributing more than 40%. Supply limits, French production, price increases, and restricted access to Kelly and Birkin bags help protect its exclusivity. LVMH’s more than 75 brands and broader appeal offer scale, but its greater exposure to aspirational buyers makes it more cyclical; aggressive pandemic-era price increases also pushed some buyers away.

China is a major source of weakness. Chinese consumers’ share of global luxury spending has dropped from about one-third to under one-fifth, as property-market stress and falling home prices weigh on household confidence. The speakers see no current equivalent to the new-buyer wave that helped drive roughly 25% annual Chinese luxury-market growth from 2016 to 2019, and believe this downturn could last longer than earlier one-year dips. Hermès has been more resilient with ultra-rich buyers, but visible spending may be less welcome during a property crisis, and local gold-jewelry brands can offer a store-of-value appeal that leather goods do not. The US is supporting demand: it represents about a quarter of LVMH sales and a fifth of Hermès sales, and Hermès grew 15% there in the first half. Gulf demand has also recovered unevenly, while the timing of a broader rebound remains uncertain.

Currency is adding pressure because both companies earn much of their revenue outside the eurozone while many costs are in France. Hermès’ first-half growth was 6% at constant currency but 1.6% reported; LVMH revenue fell 3% despite 2% underlying growth. Currency movements cost LVMH about €700 million in operating profit in the first half, with a €1 billion full-year impact expected. LVMH also faces a more specific challenge in alcohol: younger Americans drink less routinely, and Cognac is losing ground to tequila. Hennessy US retail sales fell from 5 million cases in 2020 to fewer than 3 million last year amid excess inventory, steep price increases, and other missteps. The speakers nevertheless saw the wider luxury downturn as primarily macro-driven rather than proof of lost brand power. LVMH’s fashion and leather goods margin was 34% in the first half, down from almost 42% in 2021.

The valuation declines have made the stocks more interesting but not compelling to the speakers. Hermès was about 50% below its all-time high and 35% below its level at the prior assessment, yet still traded above 30 times earnings. One base case assumes 7–8% annual revenue growth through the end of the decade, a 32-times exit earnings multiple, and roughly 10% annual EPS growth. At about €1,300 per share, that model implies a 12–13% return; at the cited €1,400 price, the return is lower. The speaker would prefer to consider Hermès around 25 times earnings, while noting that a valuation near 20 times cash flow could arise only under conditions severe enough to damage the brand or investment case.

For LVMH, a base case of 3–4% annual sales growth, modest margin improvement, and a 20-times multiple implies fair value of roughly €350 and an expected return of about 11%, below the speaker’s 12% hurdle rate; the cited trading multiple was about 18–19 times. One speaker preferred Hermès, while the other was more bullish on the sector, but neither wanted to buy luxury stocks yet. Historically, European luxury stocks have outperformed the market by 9–12% in the 12 months after consumer confidence bottoms, but the timing is uncertain. The speakers said further pain would not be surprising, and that a broader market decline could create an opportunity if brands remained intact; they also saw potentially better opportunities outside luxury.