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

You're listening to TIP. Welcome back to the Investors Podcast. Today's episode is 8.52 and Sean 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 Sean, but the last stock that I pitched to you was a meta. How I remember it well, don't worry. 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 variation lows, which for company like MS still means 30 plus multiple, but still significantly cheaper that we can usually buy them. So while we decided not to buy either of them last time for a 20 value portfolio, maybe this time it's different. But 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 are 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 on the stock. Well, that's just not the sort of margin of safety like investment set up that we look for. I got to say, though, I especially liked 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. And that is why we're here to record today's episode. So let's get into it. 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, Sean O'Malley and Daniel Manker. All right, Daniel, where do you want to start today? 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 when you have $20 million in the bank account, you're not really that faced 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. 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. On average, we'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 Birken bag, but they're buying more entry-level products. 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 MS 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 Birken bag, which is, you know, their signature bag or something like a Kelly, which is another one of those, but you can buy some clothing, you know, 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 markets of 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, you know, people couldn't go out, they couldn't shop or eat so that more money saved in the bank account. 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 know, you're talking cars, hotels, yards, fine dining, everything, you know, experiences, plus things you can buy, people spend about 1.44 trillion dollars on all of that just last year. So that's basically, you know, 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 dollars, but even that market is shrinking by about five to six billion dollars per year since the end of 2023. And this is basically also what we've seen with LVMH and Hermes, which just due to their size are somewhat of a proxy for the overall luxury market. And LVMH has experienced declining sales for two years in a row now, for example. And that is a bit of an outlier historically for a company like LVMH. And as you said earlier, these companies are supposed to be more stable than any other fashion companies and really the broader economy. Even after the financial crisis of 2008, LVMH only saw basically a single year of what was flat sales. So not even the great financial crisis could bring down LVMH's growth trajectory. And for us to now be seeing LVMH's sales drop to 2022 levels, it's definitely very concerning to shareholders and the stock has acted accordingly. And it's not only LVMH. I mean, there's a similar pattern in all of luxury and also for MS, although I would say that you can clearly see LVMH's struggling more than some of these companies, especially the top two ones like MS, which has also seen sales declines, but not yet a single year of negative sales growth, except for the pandemic in 2020, 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 12 months. So that's essentially the lowest level that we have seen in the last two decades. In the first one or two years, after the exuberant times of the pandemic, it was understandable that growth was somewhat pulled forward, but things do not seem to get any better. And I think that's why the market is currently a bit more skeptical when it comes to these luxury companies. And for both companies, so LVMH and MS, part of the reason why it's not getting significantly better is Asia and especially China, because growth came down in basically all geographies, but the biggest decline has been seen in Asia and especially in China. This used to be the consistently fastest growing market of the last decade. I mean, just in the last three years, it was basically the slowest growing market for MS, even reaching close to zero growth in this quarter. And that's just something that didn't happen before. And once again, the picture is even more severe for LVMH up the two, right? Asia revenue for them declined about 20% from its peak in 2023. And then US revenues for LVMH have stagnated since 2022. And then in Europe, you're seeing their revenues start to stagnate since going back to 2024. So the common problems for LVMH and Air MES are that firstly aspirational buyers have spent less in recent years in China as the kind of centerpiece of demand for the luxury good market. Demand there has slowed down significantly at the same time. One of the best metrics that you can look at is basically just the absolute number of customers. So the luxury industry had about 400 million customers in 2022. And now it's about 330 to 240 million in 2025. So they're lost about 70 million customers in just three years, and obviously since that was more severe than, for example, the revenue numbers of companies like LVMH and certainly MS, you can tell that the high spenders, they are still spending, but the people on the margin left. So those are the aspirational buyer. And then at the top, you've generally people spending more than 50,000 US per year on luxury good. So that's at least 50 t-shirts I'm just kidding, of course. So that's a tiny group of people. I think when I read the numbers, it's below one million people worldwide that spend as much money on luxury goods, but it accounts for something like a fifth of all luxury spending. And it also has been growing at about eight to nine percent for over a decade, which is significantly faster than the aspirational buyers. In the middle, you have something that the industry calls absolute clients. So they are spending somewhere between 5,000 to 50,000 years a year, which is sort of a big range. But that's where they generally are at. And then at the bottom, you have what we've discussed already, these aspirational clients. And they are defined as, as you said, spending less than 5,000 years, oftentimes it's a lot less than those 5,000, for example, it's just one back and that's basically all the money they spend in one year. And those are, you know, hundreds of millions of people. But again, that group is not only having a hard time, but now it's also growing significantly slow. It's just one percent a year. And that's not only the case in the last two or three years, it's basically the case over the entire last decade. And to some extent, I think that puts a mirror up to society right now where you have even people who would be considered the top percentiles of wealth, some of them are falling into this aspirational buyer category and not able to keep up with price increases because these brands really have pushed their pricing power. Between 2019 and 2023, the whole industry pushed up prices enormously and it made a lot of products just simply unaffordable for the upper middle class customer who used to buy one nice bag every couple of years, a Lovaton bag that cost $1,500 in 2019, costs $2,500 today. And so the customer did not get 60% richer necessarily in the meantime. And when you have a larger number of aspirational customers that make up the kind of demand composition for your brand, you tend to price out a large chunk of your customers, of course, by doing that. And that is sort of the problem that LVMH has seen. These price increases looked reasonable in 2022 and volumes were much higher. And this was a good way to make money and also protect the brand from having too many people gain access, but you flash forward a couple of years. And now the products are unaffordable for aspirational buyers and kind of first time luxury purchasers. And just going back to that point on not wanting everybody to gain access. I mean, that is one of the key selling points of luxury. You don't want everybody walking around with a Lovaton bag from the brand's perspective. The problem is that luxury brands though can't discount or just set back prices. So now their products are significantly more expensive and they're kind of trapped there. And the consumer can't really keep up with that pace. It's also quite interesting if you just compare that with other brands in the luxury space. So some names are performing quite well even right now. And then it's always interesting to see what do they make differently compared to, for example, LVMH and MS. And the best performer in the industry right now is Rich Moore, which is basically a group of brands that are specialized in what they do. Primarily it's jewelry. So you have brands like Cartier, Funcleaf, you have specialists watchmakers like Langer and Zürner or Vacheron Constantin. And also some fashion brands that I've got to be completely honest. I don't personally know much about them. I think it's not a big part of their business. But I got to say they're what's put for you. It's quite impressive. I mean, especially brands like Langer and Zürner, Vacheron Constantin, IWC and also Cartier are all high prestige brands with pretty good standing. And then you have LVMH on the other hand, which owns brands like Sneed, Bulgari, Tarkhoyer and Uplo and I don't want to throw any shade. But I would personally say that's not necessarily the same level as Rich Moore. But anyway, you know, they did quite well going 20% overall. And I talk about Rich Moore here, not LVMH. And the main contributor to that has definitely been the jewelry part of the business. So one differentiating factor if you want to compare those businesses seems to be the jewelry is doing a lot better than fashion. And it sort of fits our narrative here where basically they're significantly higher price tags for those products. So it fits the story of, you know, aspirational buyers are not buying anymore, but the top 1% they are still there. So some extent for there to continue to be this demand for jewelry products, I think a lot of that is coming from the huge increases in gold and silver prices that we've seen in the last few years because that really does plan to the argument that these are some as they're trying to rationalize a purchase that maybe the jewelry is something of an investment as opposed to simply just being an expense. And so I actually had a really interesting conversation with somebody at a wedding recently, which I know I told you about Daniel, where they had a pretty unique perspective on how to rationalize a Rolex as an investment. And he basically saw it as a networking investment where when he had it on, he's more likely to attract other people interested in Rolexes into conversations. And that sort of creates a shared interest and connection to be able to network with wealthy individuals, right? It's an excuse to talk to the upper echelons of society. And admittedly, I don't know all that much about watches, but I don't think it's a totally crazy argument when you also consider the fact that Rolexes tend to hold their value across time. So if you take care of it, you're pretty likely to not lose your money or not lose much money. And then while you wear it, it does upgrade your social status in a way that maybe creates new business opportunities from time to time. And obviously this is not an investment in the typical way we talk about investments. But as an excuse for making an expense of purchase, I've definitely heard worse excuses. I mean, it's a pretty compelling one. I think it's fair. Yeah. And obviously as a watch over myself, I'm the first to try to justify it by calling it an investment. I'm definitely first to line there. Also, I would say that watches are generally considered good investments at the right price. I don't know if I would actually agree with that. I think there are certain time pieces that from a monitor perspective can actually be good investments. I think most are not. Most of the time, as you said, they might hold their value generally. But if you wear it and it gets used, you will definitely lose some money. Obviously, if your argument is that it's good for networking, which probably is true to some extent, also depending on which watch you will actually wear, I think I can live for that argument. I would say I think what also helps brands and something that I looked into further like Cartier or these sort of brand jewelry is that they are actually taking share from independent jewelers, which is kind of interesting because I thought there was a movement to support independent jewelers more. For example, there's a movement in the watch space where independent watch brands are doing better and better. So apparently, that's not necessarily true for jewelers. But I mean, for us, it's kind of good because the LVMH is also benefiting from it. They are brands like Bulgarian Tiffany, which obviously are both owned by LVMH were up 11% last quarter. But the problem is that for LVMH, jewelry is only about 12 to 13% of sales. Richmond, on the other hand, makes over 70% of its sales with jewelry. And if we include watches, it's actually closer to 90% to almost the entire business. Also, how do things compare for some of these other companies that are considered ultra luxury? I believe you mentioned a company called Brunello Cuccinelli last time we discussed Hermès. So maybe how are they fairing? Yeah, that's a sort of brand that I mentioned when I said you can spend a thousand dollars on a t-shirt if you feel like it. And at that price, you have certainly priced out all the aspirational buyers and you only left for the probably top 0.1% to be honest. But perhaps that's also why Cuccinelli was unfazed by the recent struggles in the luxury market and just kept going nicely. It's not a perfect calm for a mess. I would say just because it's significantly smaller, it's about 10% of a massive size. It's still expanding its store count too, which is something that Hermès has not done in recent years. Actually, the store count came down and as a smaller brand, they also haven't yet made it into Asia, which again is part of the market where it currently there are a bit of struggles with the buyers. And for them, I think the Americas are 37% of sales or almost 40% and that region grew 20%. So once you reach a certain size, I think you have to play in Asia and just sort of also have to open up to aspirational buyers at least with some products in the categories. I think Hermès, for example, is one of those brands that for the longest time was brand for the top 1% maybe even the top 0.1%, but the more volume you have, the faster you want to grow. And it's always a balance, but you have to let aspirational buyers into certain categories of what you sell. And when you look at brands like Gucci, Christian Dior, or Gucci's parent company, Karen, they're pretty much all experiencing the same thing as LVMH. So the differentiating factors right now are Asia and specifically China exposure, as well as the target customer. And so the more you sell to the top 1% and the more of that is done outside of Asia, probably the better you're doing right now. But before we go deeper into the current situation, how about we just do a little bit of a refresh more generally on LVMH and Hermès and how they differ. Besides the fact that LVMH has more aspirational buyers than Hermès, which we know quite well. Yeah, I think probably the biggest difference is that MS is more or less just one brand, while LVMH is a conglomerate of brands, as you said, and you pitch back then. Actually, the biggest luxury conglomerate in the world, where MS has basically 16, what they call mateys, which is their word for product categories. And then you have a small side investment, which are brands like John Loeb, Shoes, and San Luis, Crystal. But again, that's, you know, very small part of its business, at its heart, it's one brand. And most people also connect MS more or less to one special product, which is obviously their backs. So they make up almost half of the company's revenue. So MS is, I would personally probably say a very concentrated bet on one brand and one product. Actually, even geographically, there's a concentration risk since Asia excluding Japan is more than 40% of sales. MS does come with tremendous history, though, and a very defined approach to selling luxury. So to some extent, they've pioneered the weightless approach in fashion, which by now, there are a lot of brands doing that, but MS was sort of the front runner on that. So I would say that they basically did what the book, the luxury strategy, is pointing out. So don't respond, to rising demand, keep supply below what the market actually wants, race prices over time, not to cover costs, which is something that other brands would technically do, but luxury companies don't. You only race costs because a higher price makes the product look more desirable to your customer base. And then you just make it hard for people to buy. So you don't advertise a seller, you basically advertise to both the mirth, which is sort of the history of the brand, which is also something that we discuss with most of the luxury brands that they have a history, which is not necessarily luxury, but more like excellence in a certain niche. And then over time, they get into this luxury, basically department of selling there. And another big part that you imagine that will that'll be a image is to keep people out who aren't actually your customer. So, you know, you only sell it in stores, you don't sell it online, you don't move production to a cheaper country. So for MS, it's for example in France and you don't go to Vietnam, you don't go to China, that's quite important. Then maybe the most important point, you have a history again that nobody can copy. So that's one differentiating factor where if you ask why do you buy MS, why do you not buy Chanel, why do you not buy Louis Vuitton, it's because the history of MS is sort of what makes the brand. And I think that's probably the most important points. And there you have it, I basically saved your reading, the luxury strategy again. Let's take a quick break and hear from today's sponsors. 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The guide is free to you at NetSuite.com/TIP. NetSuite.com/TIP. All right. Back to the show. Well, some of these brands tie all the way back to the Napoleonic era and literally making products for Napoleon. So that's a sort of pedigree. We're talking about when you can't match their history. And then to your point on this idea of trying to keep the people out who aren't really your target customer, if we just linger on that, that essentially means limiting access for maybe the lower end of the aspirational buyer cohorts. These are people who make very, very high salaries but don't have net worse in the tens of millions of dollars. These are folks at LVMH has largely introduced to the world of luxury. And that's also why they raise prices so aggressively during the pandemic period and then how that has sort of backfired against them. But aside from that mistake, LVMH has done a tremendous job over the last few decades finding the right balance between staying luxury and introducing aspirational buyers to the brand to grow volume. And in bag times like right now, it might not seem that smart since the business is now more cyclical and perhaps not as high-end as AirMez. But LVMH has become the biggest luxury brand in the world for a reason. And maybe it's a bit like Rolex. Rolex is probably still considered higher up on the luxury scale, but it does get criticized fairly often for the pretty substantial volume that it still sells. And the reality is that this is what makes up kind of the best of the best luxury brands in the world. They have this ability to balance desirability and accessibility and there's a real art to it. And so AirMez has limited aspirational buyers. So only being able to purchase ready-to-wear products and kind of accessory parts of the business, which allows them to grab some of the volume, but they protect their most important and most prestigious products, which are the bags, the handbags, and especially bags like the Kelli or the Birken. They protect those. And you have to literally earn the right to purchase them and prove yourself as a consumer because there's only so many of these that are distributed each year. And the employees at stores, it's really left to their discretion to some extent to decide how to allocate who gets which bags. That's what actually is so common by now that there's a name for it and it's called Gating. So you basically first have to build a purchase history buying these lower prestige goods and only then you'll be invited to buy the more prestigious bags. Just kind of funny in itself because usually if you want to buy something that's your decision, then you go to the store and you buy it. In this case, it's not necessarily your decision. You actually get invited to a certain flagship store and then you will also not have the opportunity to just buy whatever Kelli back you want, but there will only be two or three available. They will be shown to you and then out of those three, you can make a decision on which of those three bags you want to buy. And I could imagine that if you decline one of them because you don't necessarily want one of those, maybe you want a different color that doesn't reflect too well on your wait list approach. I think if you decline a Kelli, you might not get a chance again to buy another one. And that's basically how it works. And on the one hand, there's obviously drives a lot more sales because you're not only selling the bag, but you're selling at least the same amount of money before and lower to your product. But even more importantly, it does protect the brand from the wrong brand ambassadors. And that's pretty much what you want to see. If everybody has LVMH back, for example, and shares it on Instagram, it's just not something special anymore. You want to see to some extent as few people as possible, but then also the amount of people you need to still have volume if you're a luxury band, which again, it's incredibly difficult to reach that. So I have huge respect for LVMH, but also Rolex, who are brands that basically for decades achieved exactly this balance of having enough people buy your products, but also making it kind of difficult to get them. Another also sort of small advantage that I personally like is that a mess doesn't have this signature print as Louis Vuitton because that also makes it so much easier to get all of these fakes that you see. If I see a Louis Vuitton back out there, I just don't know if it's a fake or if it's real. If I see a mess, there's a pretty high likelihood that it's real simply because there's no signature print. Like you sort of have to see it. It kind of reminds me all the time when I see it outside of Ludulemon, which is a totally different brand, but I always tell you that I don't even see when somebody wears Ludulemon outside because they don't have huge Ludulemon logo or whatever on their sweaters. So I don't see it while you would immediately spot it. And it's similar with a mess where you can see it if you sort of know how they look like and you have the eyes for it. But if you don't, you wouldn't even necessarily recognize that you have an AMAS back in front of you. I think that's right. And I appreciate you invoking Louis Vuitton despite the financial pain that investment inflicted on us. And I think to some extent, the omnipotence of LVMH products has made them into what they are and also worked against them in some ways. And so most women who think of buying their first luxury bag, they're going to go for an LVMH bag. And that is pretty much true all over the world. And while LVMH looks like a more diversified bet comparatively against Hermes, with more than 75 brands, these so-called Maison across five segments, LVMH is also quite concentrated in some ways too. And the most important segment is unsurprisingly fashion and leather goods, which consists of Louis Vuitton, Dior, Laura Piano, Selene, Fendi, and others like that. And so then in the wanting and spirits business, you've got Moette, Hennessy, and Dom Perion, perfumes, and cosmetics as well, watches and jewelry. And that includes Tiffany and Bulgaria. And what they call selective retailing, which is basically Sephora plus the sales that they do duty free at airports. And so it sounds very diversified, but really fashion and leather goods make up almost half of all their revenues and 75% of their profits. So the business is very concentrated on that one area. Just so listeners know, especially the French listeners, we do pay attention to how these brands are pronounced. Obviously we're not the best at it, but I'm quite proud of Sean for getting all these names not only included here, but also doing a pretty good job of pronouncing them, I would say. But as you said, especially because it looks with all that, you know, fashion and leather segment is as to make it to make up about half of profits. So leather and goods basically just to summarize it are 75% of profits. And of that 75% half of it is just the Louis Vuitton brand. So it's pretty concentrated even though it doesn't look at it. If you look at, you know, all the brands that LVMH actually owns. But geographically, it's quite balanced. So there you will basically have Europe and the US, which are both about a quarter of sales each. Asia excluding Japan is 30% and then Japan itself is 8%. And then everything else is 30%. So basically you have the very global brand that to some extent is concentrated in what they sell, especially in terms of the brand. But otherwise geographically at least it's quite diversified. We've only had to stop about every other minute to Google the pronunciation of a lot of these brands. And so that's been edited out for your convenience. But I'm sure there would be a great blooper reel for folks. If they wanted to watch this episode back. But yeah, all those numbers I think explain pretty well why LVMH is having such a difficult time right now. Fashion and weather goods had seven consecutive quarters of negative organic growth from the third quarter of 2024 through the first quarter of this year. And then Konyak historically the other major profit contributor saw profit drop 25% last year. And at the same time Sephora and Jory did however do pretty well. But these are much, much lower margin businesses. So it's very difficult for them to offset the profit decline on their own. And so while revenue is already looking weak and there was some diversification protection, the profit drivers are more concentrated and have had a rough time. And that has led to a 25% decrease in profits since the end of 2023, which is really sharp for a company. That is, you know, a compounder bro favorite. A scene is one of these top quality businesses that you can own where you expect things to mostly just go up into the right. But even after this big drop off and sales, I think it's fair to say what really is the likelihood that LVMH won't recover. And I would say quite low probably. With Jory in retail like Sephora growing plus comebacks from sort of mean reversion in the wine and spirit segment, you could have relatively strong performance in large parts of the business. And then you pretty much have to more or less only 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. And speaking of macro headwinds, maybe we should talk about the macro situation a little more overall and China specifically given its importance to the global luxury market. I think China is very important. Not only because you definitely have some, I would say, weak times for the Chinese consumer. But also that if I would have to say that the brands themselves are endangered in any geography, it's probably in China. And we'll get into why I think that is. But again, like if we want to look at MS and LVMH and sort of figure out when they might recover, and we definitely need to look at the Chinese market. So focusing on it basically from 2017 to 2021. So that was four years. The luxury market in mainland China has tripled. At that point, Chinese consumers accounted for roughly a third of all luxury spending worldwide, which is sort of explaining to you why we need to look at this market. A third of all the luxury spending globally was just by Chinese consumers, which is just an insane set. So every brand built its store network and also its growth plan around that geography. And as we know, it wasn't only luxury brands, it was at Nike, which had a big expansion in China. Although they started a bit earlier than most other brands, and then also Lutilemen and many other Western brands that went into this market. And for a long time, it worked out quite well for them. But even they saw that there is a significant headwind right now in that geography. I think if we just go by the timeline basically, when the lockdowns came, the Chinese market fell about 10%. And while there was a quick rebound just a year later, the downward trend basically continued in the years ahead. So while brands thought, okay, we should probably double down on China after the pandemic, there was a downtrend after that. And if you just add up what Chinese consumer spend worldwide at home and also travel links, for example, at Chinese tourists in Paris or in Milan, that's now under a fifth of the global luxury market, down from a third just a couple of years ago, just to give you a dimension of how much it has decreased in the last couple of years. And a big part of the collapse in spending, I think it's been due to the struggling property market, the struggling real estate market in China. Is that right? Yeah, absolutely. I mean, home prices have been basically falling for four years now. And there's also not really an end inside yet. I mean, obviously the decline is starting to get slower, but you don't really know when it's supposed to recover. I should say that for Chinese household, property was basically the main store of wealth. So a lot of people feel considerably poorer than they did in 2021. Even if, for example, they set away, or maybe the amount of money in the bank accounts has naturally changed. And whenever you feel less secure, obviously, you start to save more money. And households now save more than 30% of their disposable income on average to basically prepare mortgages, because it's just not as safe, I would say, that for example, they can rent it out at any point. And obviously if they don't spend that money, but save it, the economy has been not performing too well. I think it actually has been in my deflation for close to three years now, which is one of the only major economies in the world that actually is experiencing deflation instead of inflation. And as always, in cycles like that, the economy gets weaker and weaker when the consumers aren't spending. Then that leads to fewer businesses looking for new employees because that consumer spending is income for those businesses and that leads to a higher unemployment rate, which yet again means fewer people having money to spend. And you get this kind of recursive feedback loop that can be very, very damaging to any economy. 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 that's actually occurring. Yeah, I think it's primarily US analysts, but maybe only because they are allowed to say it. But I think even if China's GDP is growing at, for example, 4.5%, it doesn't really matter because there's Dumar, who's the CEO of MS basically put it. He said, well, GDP doesn't drive purchases. It's either properties or equities. Obviously, equities are significantly more important in the Western world, but there are definitely many problems inside the Chinese economy that came up after Evergrande, which was basically this major real estate developer that blew up and I think was 2021. And it seems to be a long process to get the economy back on track, which is also why China is focused even more than they usually do on exporting goods in the last few years. And there's also an interesting consumer trend in the luxury field, especially where a couple of months ago, for example, I read about a brand that was called Laopu, which is basically a brand that sells gold jewelry and people queueed up for hours in front of their stores. And the special thing about it is that their jewelry is basically traditional Chinese designs. And it's also called the MS of gold. So that's why I was interested in that article a couple of months ago. And it doesn't really strike me as, you know, being the MS of gold since I also read about certain discounts, especially when the price of gold has declined. And they also don't restrict access to their products like MS does. So it's not exactly the same, but it does show you first that consumers do spend more money on jewelry compared to bags and clothing, which is also what we saw as a trend in the Western world, talked about rich model, for example. And then second, they do see this investment aspect, you know, buying gold instead of, you know, leather and fashion and bags and that sort of stuff, which is getting more important to the consumers in the luxury world. And also to some extent, it shows you that they go for these Chinese designs and not necessarily for new Western brands that now make it into China. And, you know, I said it before, people assume that maybe a Birkenberg is also an investment, but especially in the last couple of years, with where the prices of gold and silver have been, if you are consumer and you're more interested in buying something that actually holds value, and perhaps even increases in value, you probably went for gold jewelry, which is something that'll be a major MS. Simply don't have to the same extent. I think the funny thing about all this is that where you have products like leather bags, the price difference relative to the costs and materials is so astronomical that it's sort of taken for granted that you're paying just for the brand. And so nobody really fights you on it, right? Nobody goes in and asks for a discount on a Birkenberg when leather prices decline. But when you're selling jewelry, there is this real element of correlation with gold and silver prices where fundamentally, the price of gold watch or earrings or whatever it is, will their value will fluctuate based on these market factors that are beyond the brand's control. And so can the brand convince people to sort of pay a steady price for their jewelry, regardless of what's going on in the precious metals markets? And so that is, I think something that is probably not been achievable for any of the major brands, right? There is just this reality where jewelry pairs very closely with these silver and gold prices. And in the last year and last few years, I would definitely imagine that the sharp increases in gold prices has helped with shopping demand for more jewelry. But if you compare this recent downturn, which is primarily driven by the real estate bubble bursting to historical ones, how do you think they compare and what is different this time? I think there's one major prior luxury downturn, especially in China that matters to us because we can compare it. That one happened from 2013 to 2016. And back then, Xi Jinping started what he called the anti-corruption campaign and it essentially killed the relatively big, you can probably call it luxury gifting situation where basically officials stopped accepting watches, bags and all that sort of stuff. And then also business people stopped gifting them exactly that sort of stuff. And also obviously, you would at least think twice about legally buying one for yourself because it would look a bit suspicious at that time with you, for example, working somewhere and you know, politics and then you have a new Rolex, even if it was not a gift, he probably didn't do that. And just that alone was enough to basically have the entire market go flat for about three to four years time. But things did change in 2016 because you had a new generation of Chinese millennials arriving and they had a lot of money and they didn't have the same sort of fear, spending it than the other generations and because China also cut that some of the macro stuff that they did import duties and brands locally harmonized prices which then meant that more people started by in China again, compared to being tourists in again, Paris, Milan or those sort of cities. And that was enough to get the market back on track and the result has basically been 25% annual growth between 2016 and 2019, which is also the time when a lot of these brands decided we got to get into China, this is the market is growing by far the fastest out of all the markets in the world. And this time it feels a bit different because in 2013 again, it was primarily a policy hitting the rich and the economy underneath was doing fine so technically they had the money to spend it. Today, you obviously also have a bit of that policy stuff. I mean, we talked about all of the tech founders who become, you know, billionaires and then they sort of are more careful with what they say publicly. I think that's part of it, but more importantly, you have actual economic problems as we discuss. And even if they don't necessarily hit the top 1%, or at least they hit them much less, it is sort of a different animal if you actually have a problem in the economy. And then beyond that, the recovery from 2016 was primarily again driven by a way of new customers, which were the millennials. And if you compare that to today, I just don't see that sort of wave of new customers. And maybe the last point, even if you have the money in that similar to 2013 and you could go out and buy it, if the entire country is sort of in an economic crisis. And you have the philosophy of the CCP and in China generally, probably if you're the top 1%, you don't go out and buy a record amount of Berk and Bax even if you can. And 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, but many of the image brands did not enjoy that same customer's sickness. So to summarize, 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 and Hermes on the other hand is sort of affected by a different problem in China rather than the overall economy, but specifically with struggles of policy and perception. And so it's not well perceived, for example, for the ultra rich to be running around with Hermes bags while you have this major property crisis in the country and the middle classes is struggling. And so that is generally a dynamic that I think makes it hard for me to invest in luxury brands that have a lot of exposure in China at the moment. If you project this onto the company level, you basically suffer from success and the better you do, the more you get into the crosshairs of the CCP and Pendo Duo is not a luxury company, but it is a company that you pitched a couple of months ago. And as you talked about during that episode, the founder stepped down from his CEO role after becoming the wealthiest person in China because he knew about the risk and the optics that it could cause him and how it could get his company in trouble. I feel like what happened to Jack Ma a couple of years ago was it changed not only to help people outside of China perceive the policy, but even people inside of China. I think Jack Ma basically overstepped at a time where even a lot of founders in the country thought that China is more capitalistic than it wants to admit it is and that basically these multi-billionaire founders have a lot of say in how the economy should do and after Jack Ma happened, people know that they don't have as much of a say as they thought. And to me also, I got admitted very much show that you called it suffering from success, which I think is kind of fitting for this. The more successful a company gets, the harder it is to invest and that's usually when the compounding happens, right? I mean, when we talk about MS, for example, the best moment to invest in this company has been when it's established as a top-tier luxury brand when it's doing business, can grow 10% a year and just compound. And that's increasingly difficult if you operate in a market where exactly that success sort of gets you into the quarter. Which again, it's something that probably a lot of people should have known. I mean, we just talked about what happened, especially the political problems that came up in 2012. But I feel like people just forgot about it after these very good years of 25% growth in the luxury industry and basically growth all across the tech sector in China. Well, speaking of difficult markets and macro, especially as we're thinking about luxury houses, I mean, how has everything that has happened in the Middle East impacted these businesses? Because I would definitely imagine a not-so-subtle hit. You see these very flashy places like Abu Dhabi and Dubai, where you'd imagine there's a lot of luxury spending going on. I feel like just by the topics that we cover today, which is basically going from one market to the next and figuring out why it struggles, kind of shows you what luxury has a hard time today. But actually, the Middle East is only about 5 to 10% of the luxury marketer's spending in general. So depending on how you account for it, but it's not a lot of the market. So it's about 4% of the MS sales and around 9% for which more, which is the highest exposure of any big luxury group. So on paper, I would say, shouldn't move the needle. The problem, though, is that that region is basically the one everybody was counting on. Going into 2026, knowing that China struggles, and MS grew their last year, I think was about 15%, and the other companies were going quite good as well. So they thought this might be the country or sort of the region that basically balances out China. But it's not only about that region generally, the Gulf customers are also important for European sales, especially in cities like Paris, London and Milan, because when it's, you know, 45 degrees Celsius at home, it's a nice little change I've heard to make the way to Europe and then spend money at LVMH or MS in those cities. And in France alone, sales dropped 3% in the first quarter for MS. And to a large extent, that's because that customer base basically wasn't there anymore. So the good news is that it seems like this is slowly improving. At least that's what brand ambassadors are telling us. But most companies in the region, despite seeing improvements month by month, still don't fully know how to return it out over the next couple of years. So again, if you just look at the companies individually, Richemont was basically already back to growth in the Gulf by June, domestic demand in Saudi Arabia and Qatar came back fast too. And it's sort of the tourism dependent markets like Dubai that are still slow and probably stay that way for quite some time. And also what the stock market is in the US, and the property marketers in China, in the Gulf, that's oil. In all it's obviously doing quite well, sitting at about $100 at the time of us recording this. So it's not like anybody is actually getting poorer. It just said there's a lot of uncertainty. Everybody, you know, stopped flying. And obviously when those flights will come back, at some point, all the money that people still have and want to spend should also go back into the luxury market. Curious about online trading, but haven't taken the first step yet. You're not alone. And plus 500 futures is a great place to start. The futures markets are moving fast and with plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. Plus 500. That's exactly what Net Suite Next was built for. Net Suite Next surfaces insights exactly when you need them. It puts agents to work on routine tasks and problems and it lets you ask complex questions in plain language like talking to a knowledgeable colleague. NetSuite.com/TIP. This September, I was in New York for the intrinsic value conference. The talks were great, but what I kept thinking about is what happened around them. On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square, Saturday, we did it again, and Sunday morning a group of us were still debating Socrates' over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Monka. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers, and a few times a year, like New York this fall, and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. Alright, back to the show. Well, it's actually carrying the industry right now as the US market. It's about a quarter of sales for LVMage and a fifth for Hermes, and it grew 15% for Hermes and the first half. And as you just said, you should have the opposite effects as in China and the stock market here has done phenomenally well in the past two decades, and AI has only fueled more growth recently. We have many AI-minted millionaires, and by now, we're almost going to take it for granted, but the S&P 500 has once again returned these whopping returns of 16% over the last 12 months. So, despite some of these other macro headwinds, you still have enough people on the top end who are not impacted by the kind of other headwinds globally and can afford to spend on luxury, at least in the US. And they also don't have to fee any policy, so let's say public perception as it is in China. I think that's fair, and obviously, the tariff situation has calmed down to some extent too as well. I mean, there was a moment when the Swiss watch tariff was 39% in that exports basically collapse for two months, and now that tariff is out of 15%, which is the same as for many EU goods, and basically the brands have just priced in that tariff. 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. And probably if we, for example, talk about tariffs, once again, it's primarily hitting the aspirational bias, right? If you as rich as most of the MS customers are, you would also not care if you have to pay a bit more because of tariffs, it sort of adds to the fact that fewer people can actually buy those goods, which in luxury is always a good thing. But especially for the companies, what has not been a good thing is the currency situation. About 80% of our massive sales are outside of the Eurozone, and nearly all of its costs are in France. So basically in yours, so LVMatures, I think, obviously in a similar situation, being a global brand, but operating in France. So when the Euro strengthens as it did for most of the last 18 months, which I also know because I get paid in dollars, but I spend in yours, that is not good, right? And the Euro was basically getting stronger against every other currency that you can compare it against, and that's why a mass grew 6% at constant currency, which is still quite strong mid-signal digit. In the first half, but only 1.6, we bought it significantly weaker, and that's also, you know, while LVMH reported revenue fell 3% while the underlying business grew 2%. So I think that's a pretty severe impact that one should at least think about when you look at the numbers of those companies, and on the profit side, it only gets worse because it costs don't shrink with the revenues, so LVMH lost about 700 million euros of operating profit to currency in the first half alone, and expects that this will be a billion euros for the entire year. Well, how about we go from the macro picture to something of a more micro picture and look at what worked and didn't work for these companies in their respective segments? And so one of the more interesting segments right now for LVMH is wine and spirits, right? Alcohol consumption, especially in the US, seems to be in something of a sustained decline with Gen Z, consuming much less alcohol per capita than other generations sit in the past. And Gen Z is easily the most broadly pro marijuana consumption generation, perhaps as a substitute for alcohol in many cases, and if that's their vice of choice, even for celebrations. I mean, that is not a great sign for LVMH's brands like Moette or Don Perillon, and there's this pretty cool poll by Gallup that started tracking alcohol consumption and entrants amongst Americans going back to the 1930s. And so last year, 54 percent said, yes, they enjoy drinking alcohol socially. And that is the lowest number ever recorded by Gallup in their poll. So for most of the last 80 years, that number was between 60 and 70 percent. And it's not just that old people have stopped the share of millennials and Gen Z who drink at all has fallen about 10 percentage points since 2023. So US spirits revenue fell 2 percent last year to about 36 billion dollars. And nearly every category within it was down. And the only thing that has grown was canned cocktails. That was up 16 percent. And I can attest. I have seen those, it seems like everywhere, definitely rising in popularity. But I really think heavy drinking has lost its cultural status with younger people, at least compared to the way it once was in the past. And just generally they drink less often. And when they do drink, they want something specific, maybe a canned cocktail, something that fits the occasion, something with their story, but they're not always just drinking to drink. We'd probably go deeper than we should because it's a small part of the business. But I sent you this survey before because I found it just so interesting. And basically, Kanye got hit the hardest by far. And then Tequila is the only thing that grows a lot. So that's sort of the underlying trend. And at first I just thought it might be a random hot lie and that just alcohol consumption generally declines. And maybe there was one or two years where more people drank Tequila. But then I sort of remembered all the celebrities that in the last few years suddenly started Tequila brands. And I think that's always a good indicator of knowing where the market is currently moving. And they also, some of them at least, sold them for billions of dollars. So what happened is that the US has this totally accounted for over 40 percent of global Kanye sales and the US and China together and combined are 80 percent. So basically it's two countries completely dominating the market. And Hennessy was the biggest brand. But Hennessy's US sales, two retailers went from five million cases in 2020, so just five to six years ago, to less than three million last year. So that's a 40 percent drop from the peak. And the division has had three consecutive years of revenue decline. So it's not looking good for Kanye at all. And at the same time, Tequila took over the spot in both music and entertainment, which is why we got all these celebrities that I mentioned launching their brand. You have George Clooney, who actually sold Kazemegos, which was his brand to DRG for a billion dollars in 2017. And then after that, you had the rock candle general, Leiborne James, all of those people coming out with their own Tequila, which again, they find kind of amusing. And it sort of became the new status ring. So at the same price point, ask Kanye, and basically also aimed at the same consumer, but a lot more, let's say with the time going, then Kanye, for example, appears to be. So it's not that people stop drinking expensive spirits, it's just that they switched what they drink. I think that makes sense because the luxury thesis should also apply to alcohol, right? So even if overall consumption is lower, people will still buy the finer things, you know, special bottles, because it's more about experience and tradition and social cloud than there really anything else. Although it's probably a similar debate to aspirational levels as the top 1%, where the top 1%, demand might not change as much, but overall volume is significantly lower. And then, you know, the top 1% won't be able to make up for all the loss volume. So if I have to look out in the future for LVMH specifically, I would still believe that there will be loss volume overall, and that part of the business won't do too well. And then also what added to the property client is at Hennessy, and this is another interesting fact, was sitting on a lot of inventory when demand slowed down, because you have to plan so far in advance due to the years that it takes for the Kanye Act to be ready, that it's just a huge problem for them. So they laid down inventory for, you know, the 2020 and 2021 boom. And then when demand fell 20% just a year later, they were basically sitting on years of stock. So part of the damage and that's also part of the truth was self-inflicted, because under the previous management, the division pushed through big price increases, basically what you also mentioned in terms of the leather segment where at some point it's just so expensive that most of the aspirational buyers are not spending that amount of money anymore. And then you also had something that reminded me of Nike where they tried to go more into this direct to consumer retail push, and that didn't work out as great. And now you have, you know, trying to figure out how to get back to growth, a lot of acquisitions, which once again didn't work out. And now you basically changed the man at the top to sort of try to figure it out again. If I would have to make a guess, I think the overall segment would just get less important over time. So that's why Alexander Arno, Bernard Arno's son, who's the CEO of the LVMage, he was sent there to work on this and he's been the number two in that division since the start of last year and they've cut 1200 jobs, which is about 10% of the workforce. And they settled the Chinese anti-dumping fight by raising prices in China by 10%. So basically the duties there don't apply and then Hinesi is already launching ready to serve cocktails, which are its first product in more than 260 years that contains anything other than Konyak. And that tells you just how seriously they're taking the rise and demand for. tequila. And there are some first signs of progress here that the division grew 5% in the first half of this year and profit was up 11% mostly because the SOP, which is an acronym for very superior old ale, that product is recovering in China. And the US is still a week and expected to say week this year that for them. So basically all of what they're currently trying to do is they attempt not become more irrelevant, which is basically my base case. But again, I think the declines are also not that important because due to the pretty bad business in the last couple of years, 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 a separately client for alcohol and that will continue, it just doesn't move the needle or the share price of LVMH much more. And then also Diaggio, which is sort of an outside brand, owns a third of that division, so LVMH shareholders don't even get all of it. And I think what moves the needle significantly is really just fashion and leather as we've talked about. We mentioned how there are these overarching trends, but maybe we'll take a look at the current numbers and in more detail. And in 2021, this segment ran in operating margin of almost 42% and then that fell to just under 41% the next year. And then 2023 was 40% and then 37% in 2024 and then 35% last year. And now it's 34% in the first half of this year. And so that's seven percentage points of margin gone in five years on the segment that makes up three quarters of the group's profits. So this is operating leverage working in reverse. And LVMH has really prime real estate, the best addresses in the wealthiest cities in the world. So we have fewer Chinese or golf customers that are showing up to your store fronts on busiest streets in Paris. I mean, you still have to pay rent for that prime real estate. And management has actually said in an earnings call lately that they need about 3 to 4% of growth to get back to positive operating leverage. So we see margin expansion that goes beyond the top line growth basically. So apparently the stores, the staff, the marketing and all the other costs go at about three percent, which is what I'm getting from this. And that is what LVMH sort of the yardstick that they need to perform to get extra dollars to come in at a much higher incremental margin. Ultimately, though, we could talk about a lot of numbers for both companies which I sort of feel like we have done. But I think we both agree that currently what's happening to a mass and LVMH is primarily a weak macro environment. They're not technically losing their brand power. Even if there are trends like people going for more traditional stuff in China, for example, I think you'll have that in most places of the world eventually. But especially for the top tier brands, I don't think they need to be afraid of that. So you could argue that some LVMH brands will be hurt by that Chinese trend because they maybe not end the top tier anymore. But especially for a mass, which is actually why I prefer a mass in general, I don't expect any bigger problems. And not only because of China, but because the highest tier of luxury has just proven to be much harder to disrupt. But also, I know that's personal preference. I know that some people would, for example, prefer LVMH over a mass because it's technically more diversified. I would say that before we go to the valuation, which at some point we should get you, we should also spend some time just figuring out where exactly we are in the luxury cycle because it's pretty clear that there is a cycle going on. And we talked about a dozen numbers to just keep going down. So at some point, we've got to be at the bottom, right? Definitely a few years into this cycle, even if it maybe doesn't feel like it yet. And so the personal luxury market peaked back in 2023. And LVMH's 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. We saw really just one year dips each time and really the only comparable stretch for the luxury industry is the Chinese slowdown of 2013 to 2016 that you mentioned earlier. And even measured by that standard, we should then be close to the end of the cycle. But as we all know, and I know it's a bit cliche, history only rhymes, it doesn't repeat itself. So I don't think this time it's a bit different because we have this Chinese financial crisis that's certainly different from the old A collapse, but it's also hanging over the Chinese economy. It's not like in a way where basically the Chinese central bank and just point its way out of, you know, the crisis, which is basically happening in the US back then. But it's still there. It's less abrupt, but people are at least feeling like they have less time. They're paying off mortgages instead of spending money in the economy. And that's just a much slower process than what happened in a way. So I think it will just take a lot more time in the consensus among analysts is that home prices in China will probably fall another four to five percent this year and then stabilize in 2027. And there's also a, I would say historical rule of thumb that I found useful, which is that when you look at property downturns across countries, they typically last five to six years with the price correction of about 30% and China's downturn has started in 2021. So this is year five or six. And the corrections already been bigger than that 30% average. So that doesn't mean it's over necessarily. But it does mean we're quite late in the cycle, at least we should be in. But it's probably the most uncertain situation right now is the Gulf region. Well, last year, again, many luxury brands for like this is the market to be in that's going to balance out China that obviously didn't work out. And I think it's very uncertain when we'll see more sustainable and significant change in their region. Well, it's still a secret why the Gulf economies have been disrupted. And the unknowable question is just how long that's all going to last for. And I tend to be an optimist at heart, which would have me say that things will probably simmer down. But that optimistic mindset I've learned can look very naive in hindsight. I mean, I certainly didn't expect the Russian build up of troops along Ukraine's border back in 2021 and early 2022. It's actually lead to an invasion and a ground conflict in Europe that is still raging four and a half years later, right? So I was very much too quick to dismiss that concern. And what I know is that most times, it's true. The worst cases are avoided in geopolitics, or at least in this post-World War II period they happen. But things can also go from bad to worse right quickly when you already have a hot conflict stirring. So you're certainly not going to see me making any predictions about when oil sales and tourism are going to normalize for the Gulf states. I think what the last let's say five or six years have proven to me is these conflicts once they started, they go on for longer than you would imagine. I think that's what we've seen. And basically all of the conflicts that unfortunately started in the last couple of years. So I think that's just a part of the investment thesis where we have to assume a bit more uncertainty. And that's also what stocks trade where they are. And I think what's also interesting to sort of change the picture of what we look at is just how luxury stocks tend to perform when the bottom of such a cycle has actually come. And so assuming this has happened, what could we expect going forward? So historically European luxury stocks have outperformed the market by 9 to 12 percent in the 12 months following 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. So at least that's a positive outlook for where it could go. With all that said, how about we get to the valuation section and try to determine what is intrinsic value of these businesses? Yeah, I think it's time. And I'd say we start with a mess. When I first did a model or built the model for a mess, I mostly varied the exit multiple for each case because you know, you have a base case, you have a bull case, you have a bear case. And I mainly wanted to show the risk of investing in a company that was trading out back then in multiple in the 40s, which is obviously quite high. And I would say that worked out quite well since a big part of the stocks decline that we've seen in the last couple of months was due to the multiple going down from the 40s to the low 30s. So severe, let's call it, 20, 30% reward on just in the multiple. And now I thought I wanted to say something else. So this time, I assume the exit multiple would actually remain stable at where it is right now, which is 32 times. And then the only thing I changed were the growth rates for the top line and then the margin assumptions. So in that base case, I expect a 7 to 8% revenue cager until the end of the decade. And then growth in the next two years is likely going to be in the mid single digit range, not that much, but I do expect high single digit to low double digit growth. If we talk about 20, 28, 20, 29, 20, 30. So that's when I have to assume that the cycle is ending. And then MS is very stable when it comes to margin increases, even now in this bad time, the margin as we said earlier, didn't go below 40%. So assuming we see slight increases there in the future, I personally have EPS to go at a cake of about 10%. And then we can also not forget about the dividend that MS is paying. So while the year is low, which is something that we discussed last time that we pictured, it is growing quite quickly and significantly. And so it can add at least a bit, let's say half a percentage point to your return. So long story short, at a price of about 1,300 euros per share, I think we could expect a 12 to 13% return given these assumptions and we are 1,400 euros right now. That's basically what we're standing. Well, I am finding myself increasingly on the fringes of being a lugger shopper, not necessarily for myself, but thanks to my wife. And so I would say I'm at least better able to maybe appreciate why spending on luxury is so durable and appealing to so many people more so than I ever was in the past as sort of just a value investor. So I do have a greater appreciation for what makes a company like Hermès, special and how powerful the storytelling around their brand is. and how they've also managed to grow without diluting their brand in quality or by turning into a conglomerate like LVMage where they're just acquiring other brands. So this is probably the closest I've been to being interested in buying shares of AirMaz. But before we make a decision, though, how about we look at LVMage? Yeah, so in my base case for LVMage, I basically used your old model and then I updated the numbers and some of the assumptions obviously. So I have the company going sales at about three to four percent category, which is pretty low if you just compare it to historical rates. And that's primarily because I think it will take them some time until they can actually start growing again, at least meaningfully. And as we said earlier, three to four percent is where we see at least some operating leverage again. That's at least what the management team are saying. So I have margins growing a little, but not a lot since growth will primarily be coming in 2028 or 2030. So it's still some years out. And if you put all of that together and you put a multiple of 20 on it, which is also where the company is trading right now, actually, it's closer to 18 or 19 times, you would get a fair value of about 350 years. And since we also get dividends and the dividend yield is much higher for LVMage compared to MS, just because of the valuation here, the expected return from today would be about 11% given these assumptions. And that is a bit short of our 12% hurdle rate that we target for. So where does that leave us all? It's maybe I'm too obvious about it. But I think LVMage is more or less all of the 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. And let's say the next decade, whereas when I think about MS, I think it will get better over time. And I also think that the growth outlook for the top 1% will become better and better. Maybe it's not growing at 8 to 9% for the next 10 to 20 years, but you're going to forget to mid single digits. That's something that I definitely prefer over the 1% that we've seen in the aspirational buyers. And when I look at some of the products of LVMage, I mean, they are selling surfboards at like 15K where I'm asking myself, who buys this? I don't even think it's sort of luxury to any extent. It's probably for singers, entertainers or stuff like that. But it doesn't to me signal the same thing as a mess. I don't think they would do that at any point. And I should also say that if you're more interested in the company's philosophy, for example, right, you should definitely check out the original pitches where we got significantly more in that sort of stuff, whereas here, it's a bit of an update of what happens since then. So long story short, I think a mess just proves to be a better company than long term, and it has been going for the longest time. So if I would want to buy a company in would be a mess, but I should say that I'm just looking for the time and I don't think it's here yet, where there's actually blood on the streets as Buffett would say. And I don't know, 25 times earnings, I don't think it's there yet. A mess you still paying 30 plus times earnings. So I think I would want to buy it when I actually feel like this sentiment around is not good anymore. And people are not telling you, hey, let's look at LVMH, let's look at a mess. They are at historical lows and the quality is still there. I think I look for a bit more, let's say, a tremble in what they're actually experiencing. Yeah, I agree with you there. And I actually remember reading an article recently about how Hermes was trying to make a serious push into watchmaking to be kind of perceived of the caliber of maybe a Rolex or at least to try and rival them. And for a long time, they haven't been taken seriously, even though they have made huge advances in their product quality. And 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 Birken bag. So it'll be interesting to see how Hermes can expand into these new areas. But overall, 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 sometimes it does feel like maybe there's been blood in the streets, but not as much as we want to see for it to be obviously a point of capitulation for the bulls that would create this kind of generational buying opportunity. It would get us really excited about luxury. And for me to invest in luxury, I think that's what I would need, right? Because even though I feel as though I understand the industry much better than I once did. And so I would say I'm structurally bullish on it. I mean, there's certainly been evidence that Gen Z prefers to spend more on experiences than on luxury wear. And that is sort of a challenging trend for the industry globally, I think going forward. And on that point, I just don't love the fact that things would look much worse if luxury companies hadn't aggressively taken price in recent years. And I think that does speak to their pricing power, which is one of the attractive things about investing in luxury, but the decline in sales could have looked a whole lot worse. And with luxury items now being so much more expensive comparatively for aspirational buyers, they've sort of backed themselves into a corner where they've just raised the price of entry to being completely inaccessible. And so they've protected earnings in the short term, but that's come at the expense of future growth in many ways, right? I mean, they've kept their income statements from completely falling apart, but now there's dependent as ever on the top luxury spenders while overall volumes have just been very weak. And so you could argue for maybe some mean reversion eventually. And I think that will be true, but we might not see the benefits of that for who knows several more years, maybe 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, but not one where things are so clearly in our favor that I would want to step into an industry that I'm generally a bit uncertain about investing in. You know, I met a generally thought when I started looking into these companies and I told you that I will, you know, be covering LVMH in a month again, that I would find something that gets me more excited than it actually did. Like I looked at all of the numbers, I looked at the stories, I also listened back to our original episodes. And I think it all makes a lot of sense, but I just couldn't find anything that got me really excited about the outlook, especially for the next couple of years. And that basically made me think just generally about when would I actually buy a luxury fashion brand? And I think the problem that I found is I want to buy them at a point that I said that before when no one is calling them a great opportunity anymore, when they are actually trading at casual multiples that are in let's say 20 times for a mass, for example, right? And at the same time, I think about what wouldn't need to happen for a mass to trade at such a 20x multiple. And it would probably be so bad that the entire thesis for buying a mass is gone at that point, right? I don't know of that would mean that the brand, for example, would have to suffer significantly and how that could look like. Maybe just an example will never happen. But let's say they open up a fair break in, let's say Vietnam, right? And they're basically shifting the heart of what they do in France to some other country. There has to be something so significant that I almost can't imagine that it wouldn't maturely take away from the brand value to a larger extent that as we know from the lemon, that's not the game we want to play anymore investing in a brand, especially a fashion brand that is not doing as well anymore. And the optimal scenario obviously would be that there's a major crash, you know, a macro crash that just sweeps a company like a mass without actually the brand getting hurt. But even then, I was sort of asking myself, they would likely be so many better opportunities in such a big crash outside of luxury and fashion and a mass that I probably would still buy other companies. And although I'm more bullish on the sector generally than you, I think this just makes it significantly harder for me to buy any of these companies at any stage. And maybe it's just that after looking at Nike, Ludo Lemon, you know, Montclair, which is a company we covered too. And now I'll be amazed in a mess. Maybe the fashion space is just not for the two of us, you know, even if it's luxury and we sort of understand their different dynamics. I just was just some extent surprised that it couldn't get myself more excited about these companies. Anyway, we talked for a long time now. With all that said, I would think that it's best to find out close the episode with a quote by who else then Bernardo. And he said, quote, 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. Maybe we're a bit too impatient. Probably if you want to buy one of these companies right now, it's a good time because definitely the luxury sector is not doing good. And I'm highly confident the brand will survive for us personally for all the reasons that we just gave. It's not an investment that we want to do today. And with that said, I'll be enjoyed today's episode. And we will see you in the next one. 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