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

Daniel Mahncke · The Investor's Podcast NetworkBearish

Hermès's sales growth has collapsed to under 3%, with Asia near zero and no improvement in sight.

Hermès sales growth fell from about 40% in 2021, a pandemic-inflated peak, to under 3% over the last twelve months. That is the lowest level in roughly two decades. Hermès has had no negative sales year except 2020, but growth has declined sharply. Early post-pandemic normalisation was understandable, but Daniel says things are not getting better. The Asia slowdown is part of the cause: Asia, and especially China, was the fastest-growing market for the last decade, but it has been Hermès's slowest-growing market over the last three years and was close to zero growth in the latest quarter. The market is therefore more skeptical about luxury companies.

“But sales growth has definitely declined massively. I mean, it was going from 40% in 2021, which again was this abnormally high part of the market, to less than 3% in the last twelve months.”at 6:27

Daniel Mahncke · The Investor's Podcast NetworkBullish

Hermès's waitlist and scarcity model and unmatched history make its brand moat very hard to copy.

Hermès pioneered the waitlist approach in fashion and follows the luxury playbook from the book The Luxury Strategy: keep supply below demand, raise prices over time because demand is high rather than to cover costs, advertise to build the myth rather than to sell, sell only in its own stores and not online, and keep production in France. Its history, which Shawn ties back to making products for Napoleon, is something nobody can copy. Scarcity is gated: buyers must build a purchase history on lower-tier goods before being invited to a flagship store, where they are shown only two or three bags. That drives sales in lower-tier products and protects the brand from the wrong ambassadors. Daniel also notes that the Hermès logo-free design makes its products harder to counterfeit.

“MS does come with tremendous history, though, and a very defined approach to selling luxury. So to some extent, they have pioneered the waitlist approach in fashion, which by now, there are a lot of brands doing that, but MS was sort of the front runner on that.”at 18:52

Shawn O'Malley · The Investor's Podcast NetworkBullish

Hermès' top-tier customers keep buying despite China's slowdown, unlike LVMH's brands.

Brands serving the very top of the market still buy internationally even when China's economy struggles, and Hermès kept its customers. LVMH's brands did not show that same customer stickiness, so Hermès is the more resilient China exposure.

“this is once again an argument for investing in brands that serve the top of the top because those are the consumers that will still go for international brands, maybe not exclusively, but they certainly did not stop buying from Hermes, for example.”at 42:27

Shawn O'Malley · The Investor's Podcast NetworkBullish

Hermès' US sales grew 15% in H1 as top-end US buyers keep spending on luxury.

The US is about a fifth of Hermès' sales and grew 15% in the first half. The S&P 500 returned about 16% over the last twelve months, and AI-driven wealth keeps high-end US buyers insulated from global headwinds, so they can still spend on luxury.

“What's actually carrying the industry right now is The US market. It's about a quarter of sales for LVMH and a fifth for Hermes. And it grew 15% for Hermes in the first half.”at 50:52

Daniel Mahncke · The Investor's Podcast NetworkBullish

Hermès offers a 12-13% expected return from €1,300 with a stable 32x multiple.

The model holds the exit multiple at 32x and assumes 7-8% revenue CAGR to the end of the decade, with margins stable above 40% even through the downturn. That gives about 10% EPS CAGR, plus a growing dividend, and a 12-13% return from €1,300. The stock is now near €1,400, so the return is lower from here. Daniel still waits for better sentiment before buying, since the stock trades above 30 times earnings.

“So in our base case, I expect a seven to 8% revenue CAGR until the end of the decade. ... I personally have EPS to go at a CAGR of about 10%.”at 1:08:21

Shawn O'Malley · The Investor's Podcast NetworkBullish

Hermès grows without diluting its brand, unlike LVMH's acquisition-driven conglomerate model.

Shawn appreciates Hermès' storytelling and its growth without diluting brand quality or becoming a conglomerate that buys other brands, as LVMH has. This makes it the closest he has come to wanting to buy Hermès shares.

“So I do have a greater appreciation for makes a company like Hermes special and how powerful the storytelling around their brand is and how they've also managed to grow without diluting their brand quality or by turning into a conglomerate like LVMH where they're just acquiring other brands.”at 1:09:43

Shawn O'Malley · The Investor's Podcast NetworkNeutral

Hermès' watch push struggles as watches are seen as entry purchases for Birkin bags.

Hermès has made big advances in watch quality and is trying to rival Rolex, but it has long not been taken seriously. Customers treat its watches as entry-level purchases on the way to the Birkin bag, which limits how far the watch business can expand.

“Part of the problem that's holding them back is people just treat the watches as one of those entry level purchases that you can make to prove yourself worthy of receiving what they're really after, which is the Birkin bag.”at 1:13:03

Shawn O'Malley · The Investor's Podcast NetworkNeutral

Hermès is an incredible business with strong brand storytelling, but its selloff lacks capitulation.

Shawn sees Hermès as a very strong business. Its watches have improved in quality but are still treated as an entry-level purchase that buyers make to earn the right to a Birkin, which limits how far the watch line can expand. He says the stock has seen some blood in the streets, but not enough to mark the capitulation point that would create a generational buying opportunity. He also says he would need that kind of setup before investing in luxury, so he is not buying yet despite admiring the business.

“I do think it's a pretty incredible business when you think about what they've been able to do and the storytelling they've been able to cultivate around their brand. And so at times it does feel like maybe there's been blood in the streets, but not as much as we'd want to see”at 1:13:18

Daniel Mahncke · The Investor's Podcast NetworkBearish

Hermès outlook is not exciting enough to buy now; he would need about 20x cash flow.

After reviewing the numbers, stories and earlier episodes, Daniel found nothing that made him excited about Hermès's outlook, especially for the next couple of years. He would only want to buy once the shares trade at a cash-flow multiple near 20x and nobody calls them a great opportunity anymore. Getting there would probably take a brand-damaging event, such as moving production out of France, which would break the investment thesis. Even a macro crash would not be enough, because better opportunities would likely appear elsewhere. For these reasons he is not buying Hermès today.

“But I just couldn't find anything that got me really excited about the outlook, especially for the next couple of years.”at 1:15:19

Shawn O'Malley · The Investor's Podcast NetworkBearish

LVMH's sales and profits are falling: price hikes priced out aspirational buyers and fashion is weak.

LVMH has seen declining sales for two straight years, an outlier for a company that even avoided a decline in the 2008 financial crisis. Its price increases from 2019 to 2023 (a Louis Vuitton bag going from $1,500 to $2,500) were reasonable when volumes were high, but now they have priced out aspirational and first-time buyers, who are a key source of demand. Regionally, Asia revenue fell about 20% from its 2023 peak, US revenue has stagnated since 2022, and Europe has stagnated since 2024. Profit is concentrated: fashion and leather goods are about half of revenue and about 75% of profits, and that segment has posted seven consecutive quarters of negative organic growth. Cognac, the other major profit contributor, saw profit fall 25% last year. Sephora and jewelry are growing but are much lower margin, so they cannot offset the profit decline. Since the end of 2023, profits have fallen about 25%.

“Fashion and leather goods had seven consecutive quarters of negative organic growth from the third quarter of twenty twenty four through the first quarter of this year. And then cognac, historically the other major profit contributor saw profit drop 25% last year.”at 31:05

Shawn O'Malley · The Investor's Podcast NetworkBullish

LVMH's Louis Vuitton is strong enough that the slump is macro, not structural, so recovery is likely.

Shawn argues that the probability LVMH never recovers is quite low. Even after the big drop in sales, jewelry and retail like Sephora are growing, and wine and spirits could mean-revert, so large parts of the business could perform relatively well. The rest depends mostly on Louis Vuitton recovering, and he calls that brand very strong. He therefore sees the decline as a matter of weathering macro headwinds rather than the brand being structurally impaired. He also notes LVMH has become the biggest luxury brand in the world for a reason and has balanced desirability and accessibility well over recent decades, though he concedes the pricing mistake in the pandemic period has backfired.

“wait for the Louis Vuitton brand to recover. And I think that is a brand that's so strong. It's really just a question of weathering various macro headwinds as opposed to worrying about the brand itself being structurally impaired.”at 32:29

Shawn O'Malley · The Investor's Podcast NetworkBearish

LVMH's China slump is a middle-class problem; China-heavy luxury is hard to invest in now.

LVMH's China weakness is driven by aspirational middle-class buyers who felt richer when real estate values rose and have stopped buying luxury as property has fallen. That makes China-exposed luxury hard to invest in at present, so Shawn avoids brands with heavy China exposure for now.

“LVMH's China problem seems to really be more of a middle class problem where you had many aspirational buyers who felt rich when their real estate went up in value and now suddenly feel a whole lot less rich, if rich at all, and have suddenly stopped buying luxury goods.”at 42:48

Daniel Mahncke · The Investor's Podcast NetworkBearish

Euro strength is hurting LVMH's reported results far more than its underlying growth.

About 80% of sales are outside the eurozone while most costs are in euros, so a strong euro over the past eighteen months hurts reported numbers. LVMH's revenue fell 3% reported while the underlying business grew 2%. Costs don't shrink with revenue, so profit is hit harder, with about €700m of operating profit lost to currency in the first half.

“So when the euro strengthens, as it did for most of the last eighteen months... that is not good.”at 52:49

Daniel Mahncke · The Investor's Podcast NetworkNeutral

LVMH's wine and spirits, now under 6% of operating profit, won't move the stock much.

Cognac has been hit hardest, with Hennessy's US sales down about 40% from peak, while tequila is growing. Even so, the wine and spirits division has shrunk from about 15% of LVMH's operating profit in 2019 to under 6% last year. Even if alcohol keeps declining, that barely affects LVMH's share price.

“it basically already went from contributing about 15% to LVMH's operating profit in 2019 to just under 6% last year. So even if you believe that there's, you know, a secular decline for alcohol, and that will continue, it just doesn't move the needle or the share price of LVMH much more.”at 1:00:09

Shawn O'Malley · The Investor's Podcast NetworkBearish

LVMH's fashion and leather margin fell seven points in five years; operating leverage reversed.

Fashion and leather, about three quarters of LVMH's group profit, saw its operating margin fall from almost 42% in 2021 to 34% in the first half of this year. That seven-point erosion in five years is operating leverage working in reverse, which is why this segment matters most to the stock.

“in the first half of this year. So that's seven percentage points of margin gone in five years on the segment that makes up three quarters of the group's profit. So this is operating leverage working in reverse.”at 1:01:19

Daniel Mahncke · The Investor's Podcast NetworkNeutral

LVMH's roughly 11% expected return falls short of hurdle; brand strength won't improve.

Assuming sales grow only 3-4% a year until growth returns around 2028-2030, with margins rising a little, and a 20x multiple, the expected return is about 11% including dividends. That is below the 12% hurdle. Daniel thinks LVMH can be a good investment from here but expects its brand strength to stagnate over the next decade, and its lower-tier products such as surfboards at €15k dilute its luxury signal.

“Maybe I'm too obvious about it, but I think LVMH is more or less out of question for me personally. I think it can be a good investment from here, but I don't think the brand strength will get any better in, let's say, the next decade.”at 1:11:10

Daniel Mahncke · The Investor's Podcast NetworkBullish

Richemont is the industry's best performer, as jewelry and watches drive growth and take share from independents.

Richemont is the best performer in luxury right now. It owns specialised brands such as Cartier, Van Cleef, Vacheron Constantin, Jaeger-LeCoultre, IWC and A. Lange & Söhne, which have high prestige and standing. Its growth was about 20% overall, driven mainly by jewelry. Watches and jewelry make up close to 90% of its business, which Daniel says fits the story that aspirational buyers are gone but top buyers still spend, because these products carry much higher price tags. Branded jewelers such as Cartier are taking share from independent jewelers. Daniel notes that LVMH's jewelry is only about 12-13% of its sales, so it has less exposure to this trend.

“And the best performer in the industry right now is Richemont, which is basically a group of brands that are specialized in what they do.”at 11:31

Daniel Mahncke · The Investor's Podcast NetworkBullish

Brunello Cucinelli keeps growing through the luxury slump by pricing out aspirational buyers and expanding its stores.

Cucinelli prices its products so high, around $1,000 for a T-shirt, that it has priced out aspirational buyers and serves only roughly the top 0.1%. That may explain why it has been unaffected by the recent luxury struggles and kept growing nicely. It is still expanding its store count, whereas Hermès has reduced its store count in recent years. Cucinelli is about 10% of Hermès's size and has not yet entered Asia, where demand is currently weak. The Americas are about 37-40% of its sales and grew 20%.

“But perhaps that's also why Cucinelli was unfazed by the recent struggles in the luxury market and just kept growing nicely.”at 16:30

Daniel Mahncke · The Investor's Podcast Network

Luxury has lost about 70 million customers since 2022, with aspirational buyers falling away.

The number of luxury customers fell from about 400 million in 2022 to about 330-340 million in 2025, a loss of about 70 million in three years. Revenue at LVMH and Hermès has not fallen as much, so high spenders are still spending while the people on the margin, the aspirational buyers, have left. Aspirational buyers are roughly half of the total luxury market value, and their numbers grew only about 1% a year over the last decade. The top tier, under 1 million people spending over €50,000 a year, accounts for about a fifth of luxury spending and has grown 8-9% a year for over a decade. Shawn adds that price increases have pushed many upper-middle-class buyers out of the market.

“So the luxury industry had about 400,000,000 customers in 2022, and now it's about 330 to 340,000,000 in 2025. So they lost about 70,000,000 customers in just three years.”at 8:21

Shawn O'Malley · The Investor's Podcast Network

Luxury downturn is longer than past crises; the cycle should be near its end.

LVMH's core segment has been flat or negative for seven quarters, three years past the peak, and the pullback is longer than the financial crisis or COVID dips. Measured against the 2013-2016 China slowdown, the cycle should be close to its end.

“core segment has now been negative or flat for seven quarters, and we're three years past the peak there and roughly two years into a contraction. So there has been a significantly longer pullback than during the financial crisis or COVID.”at 1:03:35

Shawn O'Malley · The Investor's Podcast Network

Luxury is structurally bullish long term, but more near-term pain is likely before a good entry.

Shawn is structurally bullish on luxury, but he is not yet ready to invest. Volumes are weak and the industry depends more on top spenders. Mean reversion will probably come, but not for several years, so he would not be surprised by more pain for the luxury houses. He calls the current setup a decent one to invest in these companies, but he would need a clearer capitulation point to act.

“I would say I'm structurally bullish on it. ... So I wouldn't be shocked by any means if there was more pain ahead for the luxury houses and I think it's a decent setup to invest in these companies”at 1:13:51

Shawn O'Malley · The Investor's Podcast Network

Luxury price hikes protected earnings but priced out aspirational buyers, hurting future volume growth.

Luxury houses took aggressive price increases, which shows pricing power and kept sales declines from looking worse. But prices are now so high that aspirational buyers are effectively locked out. Earnings are protected in the short term at the cost of future growth, and the businesses now depend more on top spenders while overall volumes are weak. Gen Z spending more on experiences than on luxury wear makes this a challenging trend for the industry. Shawn expects some mean reversion eventually, but says the benefit may take several more years to show up.

“They've sort of backed themselves into a corner where they've just raised the price of entry to being completely unaccessible and so they've protected earnings in the short term, but that's come at the expense of future growth in many ways”at 1:14:42

Daniel Mahncke · The Investor's Podcast Network

He is uncertain about fashion and luxury investing, given weak outlooks across Nike, Lululemon, Moncler and LVMH.

Daniel says he is generally uncertain about investing in the fashion and luxury industry, though he is more bullish on the sector than Shawn. After reviewing Nike, Lululemon, Moncler, LVMH and Hermès, he found no fashion brand that clearly excited him. His takeaway is that the fashion space may simply not be the right area for him, even though he understands the different dynamics of luxury.

“And maybe adjust that after looking at Nike, Lululemon, ... Moncler ... and now LVMH and MS, maybe the fashion space is just not for the two of us.”at 1:17:05

Daniel Mahncke · The Investor's Podcast Network

China's property collapse and deflation are crushing household spending, making China the weakest luxury market.

China's luxury market tripled from 2017 to 2021, when Chinese consumers were roughly a third of global luxury spending, and brands built their growth plans around it. It has since collapsed to under a fifth of global luxury spending, including Chinese tourists abroad. The main cause is the property slump: home prices have fallen for four years with no end in sight. For Chinese households, property was the main store of wealth, so many feel poorer than in 2021. Households now save more than 30% of disposable income, often to prepay mortgages, and the economy has been in deflation for close to three years. Daniel argues that the brands are most endangered in China, the market they relied on most.

“home prices have been basically falling for four years now, and there's also not really an end in sight yet.”at 34:46

Shawn O'Malley · The Investor's Podcast Network

China's reported 4.5% GDP growth likely does not match underlying economic reality.

Shawn argues that weak consumer spending in China leads to fewer businesses hiring, higher unemployment and a feedback loop that can damage the economy. In that context, many analysts suspect the published 4.5% GDP growth figures are not matching the underlying reality. Daniel agrees that the figure may be overstated, but says it matters less for luxury because GDP does not drive purchases; property and equities do.

“And so in China, I think many analysts have suspected that the four and a half percent GDP growth numbers being published are not exactly matching the underlying reality.”at 35:40

Daniel Mahncke · The Investor's Podcast Network

China luxury recovery unlikely to mirror 2016 rebound; no new millennial customer wave now.

The 2013-2016 slump was a policy shock to the rich while the wider economy was fine, and a new wave of millennial buyers drove the recovery. Today China has real economic problems, which hit the broader population, and Daniel sees no comparable wave of new customers, so the recovery is less likely to repeat.

“you have actual economic problems as we discussed... it is sort of a different animal if you actually have a problem in the economy. ... I just don't see that sort of wave of new customers.”at 41:46

Daniel Mahncke · The Investor's Podcast Network

China property downturn is late-cycle, already beyond the typical 30% correction.

Across countries, property downturns usually last five to six years with about a 30% price correction. China's began in 2021, so it is now in year five or six, and prices have already fallen more than 30%. That points to a late-stage cycle, though not necessarily a finished one.

“they typically last five to six years with a price correction of about 30%. And China's downturn has started in 2021, so this is year five or six, and the correction has already been bigger than that 30% average.”at 1:04:58

Daniel Mahncke · The Investor's Podcast Network

Middle East is a small revenue share but removes the growth offset to China.

The Middle East is only about 5-10% of luxury spending, around 4% of LVMH sales and 9% of Richemont's, so on paper it should not move the needle. The problem is that the Gulf was expected to balance out China in 2026 and tourism-dependent markets like Dubai will stay slow for a long time, so the offset is gone.

“But actually, The Middle East is only about five to 10% of the luxury market or spending in general... So on paper, would say it shouldn't move the needle. The problem though is that that region is basically the one everybody was counting on going into 2026...”at 45:27

Shawn O'Malley · The Investor's Podcast Network

Fed rate hikes are the biggest macro risk for luxury now that tariffs are priced in.

The Swiss watch tariff spiked to 39% and exports collapsed for two months, but it is now 15%, the same as many EU goods, and brands have priced it in. The bigger risk is the Fed raising rates and hitting US financial asset prices, which would hit the wealthy buyers who currently sustain luxury demand.

“the tariff situation has calmed down to some extent too as well... now that tariff is down to 15%... So really the biggest macro risk right now might be the Fed raising rates and whatever impact that that has on financial asset prices in The US.”at 51:45

Daniel Mahncke · The Investor's Podcast Network

European luxury stocks historically beat the market 9-12% in the year after confidence bottoms.

Historically, European luxury stocks have outperformed the market by nine to twelve percent in the twelve months after consumer confidence bottoms. Luxury tends to be the best-performing industry the year after, and confidence is currently as depressed as it has been, so this points to upside.

“European luxury stocks have outperformed the market by nine to 12% in the twelve months following a consumer confidence bottom. And when confidence is as depressed as it is right now, luxury tends to be the one best performing industry in the year after.”at 1:07:08