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

Luxury’s recent weakness is exposing how dependent the sector has become on aspirational buyers: relatively high earners who rely on monthly paychecks and spend about $1,500–$5,000 a year on luxury. They account for roughly half the market’s value and helped drive growth in 2022–2024, when pandemic-era support, rising markets and accumulated savings boosted spending. But they are more likely than wealthy customers to retrench when confidence and the economy weaken. The overall luxury market was about $1.44 trillion last year and flat year over year, while personal luxury goods, at about $360 billion, had been shrinking by roughly $5–$6 billion annually since late 2023.

LVMH has reported two consecutive years of declining sales, an unusual stretch that has taken revenue back to 2022 levels. Hermès has slowed from about 40% growth in 2021 to less than 3% over the latest 12 months discussed, its lowest rate in roughly two decades, though growth has not turned negative outside the pandemic year of 2020. China and broader Asia are major sources of pressure: Hermès’ China growth was close to zero in the latest quarter, and LVMH’s Asia revenue was about 20% below its 2023 peak. Chinese consumers, once responsible for roughly one-third of global luxury spending, now account for less than one-fifth.

The China downturn is tied to falling property prices and weaker household confidence, rather than simply a repeat of the 2013–2016 luxury slump. Property had been a major source of household wealth, and Chinese households now save more than 30% of disposable income on average, partly to prepay mortgages. The earlier downturn followed an anti-corruption campaign that curbed gifting while the wider economy remained healthy; luxury spending then grew about 25% annually from 2016 to 2019, supported by new millennial buyers and lower import duties. The speakers see no comparable new-customer wave today, and caution that the property correction may persist beyond forecasts for stabilization in 2027. Laopu’s traditional-design gold jewelry illustrates stronger demand for jewelry with investment appeal, unlike branded leather goods.

The companies have different vulnerabilities. At LVMH, fashion and leather goods generate almost half of revenue and about 75% of profit, with Louis Vuitton contributing about half of that segment’s profit. The segment has had seven consecutive quarters of negative organic growth, while stronger Sephora and jewelry results have lower margins and cannot fully offset the weakness. Its operating margin fell from almost 42% in 2021 to 34% in the first half of this year; management says 3–4% growth is needed to restore positive operating leverage as store, staff and marketing costs rise about 3%. Hermès depends more heavily on bags, which generate almost half its revenue, and on Asia excluding Japan, which accounts for more than 40%. Its scarcity model limits access to Kelly and Birkin bags and encourages purchase histories, supporting exclusivity and sales of other products.

Price increases have protected earnings but risk narrowing the customer base. A Louis Vuitton bag cited in the discussion rose from $1,500 in 2019 to $2,500 today, pricing out some upper-middle-class and first-time buyers; brands also have limited scope to discount without weakening their positioning. LVMH is exposed to aspirational spending, while Hermès has continued to attract China’s wealthiest buyers but may be more sensitive to conspicuous consumption during hardship. The US is supporting demand, representing about a quarter of LVMH sales and a fifth of Hermès sales; Hermès sales there rose 15% in the first half. That strength may reflect stock-market and AI-related wealth, but potential rate increases and falling financial assets are risks. Currency also weighed on reported results: Hermès’ 6% constant-currency first-half growth became 1.6%, while LVMH’s revenue fell 3% despite 2% underlying growth.

Both companies were described as near historical valuation lows, but neither was considered an immediate buy. Hermès was about 50% below its all-time high and roughly 35% below the price at the hosts’ previous review, yet still traded above 30 times earnings. Its base case assumes 7–8% annual revenue growth through the end of the decade, a 32-times exit multiple and slightly higher margins, implying about 10% annual EPS growth and 12–13% expected returns at roughly €1,300 per share; the share price discussed was about €1,400. The speaker preferred Hermès long term for its storytelling and ability to grow without diluting the brand, but wanted weaker sentiment and a more pronounced downturn before buying.

LVMH’s base case assumes 3–4% annual sales growth, modest margin expansion and a 20-times valuation multiple, implying fair value of about €350 per share and roughly 11% expected returns, below the speaker’s 12% hurdle. One speaker expects LVMH to recover as macroeconomic pressure eases, while the other expressed less confidence in its brand strength over the coming decade; diversification remains a counterpoint in LVMH’s favor. Historically, European luxury stocks have outperformed the market by 9–12% in the year after consumer confidence bottoms, but the timing of a recovery is uncertain. Both speakers see further pain as possible and do not want to invest now, preferring much lower valuations—around 20 times cash flow—even though reaching those levels could require damage to the brands or the investment case.