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

SPEAKER_1 (0:00)

You're listening to TIP.

Daniel Mahncke (0:03)

Welcome back to The Investor's Podcast. Today's episode is 8.52 and Shawn and I actually had a one-week break. No recordings of the two of us. And I can safely say that doesn't happen too often. So you may have already forgotten, Shawn, but the last stock that I pitched to you was Meta.

Shawn O'Malley (0:20)

Oh, I remember it well. Don't worry.

Daniel Mahncke (0:23)

Well, today I thought I wouldn't just pitch you one stock, but actually two. In fact, we looked at the two companies before.

You covered LVMH in July of last year, and I covered MS in February of this year. But since then, both stocks have become arguably even more attractive as they have kept dropping and have now reached historical valuation lows, which for a company like MS still means 30 plus multiple, but still significantly cheaper than we can usually buy them. So while we decided not to buy either of them last time for Intrinsic Value Portfolio, maybe this time it's different.

Shawn O'Malley (0:56)

Well, we definitely like the businesses, but we were a bit concerned about the valuations. We would have had to pay for the shares in them. And then there were also some macro concerns that were already starting to show up. And anybody who knows us knows we're not macro investors, but when the consequences of macro economic developments are already being felt at the company level, and then you're still paying a premium, a hefty premium at that for shares in the stock, well, that's just not the sort of margin of safety like investment set up that we look for.

Daniel Mahncke (1:26)

I got to say though, I especially like MS, which now is 50% from its all-time highs and about 35% lower, so quite significantly lower than the last time we looked at the stock. But as you said, they definitely are concerning trends with these companies that cause us to not just look at the stock price, but actually figure out what's going on.

Shawn O'Malley (1:44)

And that is why we're here to record today's episode. So let's get into it.

SPEAKER_1 (1:52)

Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you.

This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investment in the securities discussed. Now for your hosts, Shawn O'Malley and Daniel Mahncke.

Shawn O'Malley (2:37)

All right, Daniel, where do you want to start today?

Daniel Mahncke (2:40)

So maybe a good place to start today is the state of the luxury market in general, because it's quite interesting. I feel like luxury has been seen as this stable non-cyclical industry since its customers are supposed to be less concerned with how the general economy is doing. So you know, when you have $20 million in the bank account, you're not really that phased by how the economy is doing anymore, at least I assume. I unfortunately don't have $20 million in my bank account. But as we worked out in our original episodes, luxury brands that get bigger and bigger also sell to people who you call aspirational buyers. And this is even more true for LVMH than MS But as MS gets bigger, it definitely experiences similar things too.

Shawn O'Malley (3:21)

And just to quickly mention the definition of aspirational buyers, these are consumers who have relatively high earning jobs, but they're not wealthy or rich, or they don't necessarily feel wealthy or rich. And they do very much need their monthly paycheck when they go out and shop at LVMH. So that's sort of the difference. And on average, they're spending about maybe $1,500 to $5,000 per year, on luxury products, which is still a lot of money, by all means. And so what that also means is that they're not buying these signature pieces like the Birkin bag, but they're buying more entry level products.

Daniel Mahncke (3:56)

It's a lot of money, but it's not yet enough to buy more than, let's say, two sweaters in some of these stores. So I think Hermès is a good example of that, where if you're an aspirational buyer, you don't have enough money or even the access, to be honest, to buy, let's say, a Birkin bag, which is their signature bag, or something like a Kelly, which is another one of those, but you can buy some clothing, for example, a belt or something similar, something that's smaller, but still sort of affordable, even though it's definitely the opposite of cheap. And aspirational buyers generally account for roughly half of the total luxury market's value. And then in times like 2022 to 2024, when there was this massive splurge in fashion and luxury, especially due to the COVID checks, but also a very strong stock market and also higher savings rate, because in the years before when COVID happened, people couldn't go out, they couldn't shop or eat, so they had more money saved in the bank accounts. And in those times, aspirational buyers were especially important and sort of boosted the company's sales and profits. But obviously, those are also the customers that fall away when the economy cools down and they don't feel like they have as much money anymore. If you take all of luxury together, so you're talking cars, hotels, yachts, fine dining, everything, experiences, plus things you can buy, people spend about $1.44 trillion on all of that just last year. So that's basically sounding like a huge number, but it's also flat year over year. It's not more than they spent last year. And if you narrow it to just personal luxury goods, so handbags, clothing, jewelry, watches, beauty, all that stuff that MS and LVMH are actually selling, then the market size is about $360 billion.