Hermès: Scarcity, Prestige, Performance

Hermès is one of the most iconic names in global luxury, known for its uncompromising commitment to craftsmanship, heritage, and timeless design. From the legendary Birkin and Kelly bags to its growing presence in jewelry, ready to wear, and home goods, the brand is built on scarcity, quality, and deep cultural consistency. With a vertically integrated model, carefully curated retail network, and strong leadership under Axel Dumas, Hermès stands apart from trend driven fashion houses. The question is: Does this ultra premium brand deserve a place in your long term portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Hermès at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Hermès, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Hermès International is a French luxury goods company founded in 1837. It began as a harness and saddle maker and has grown into one of the most respected and exclusive names in luxury. The company offers leather goods, ready-to-wear clothing, silk scarves and ties, watches, jewelry, perfumes, and home furnishings. Despite its global presence, Hermès remains family-controlled and deeply rooted in values of craftsmanship, authenticity, and long-term thinking. Hermès produces most of its goods in-house at workshops located across France. These workshops are kept intentionally small to preserve human-scale operations and ensure knowledge is passed from one generation of artisans to the next. The company also maintains an exclusive distribution model, selling its products only through its network of more than 300 Hermès-owned stores worldwide. This allows it to control the customer experience and tailor offerings to local markets without resorting to discounting or wholesale partnerships. At the heart of Hermès’ strategy is a focus on timeless quality and creative expression. The company does not chase growth through pricing or acquisitions. Instead, it aims for organic expansion by carefully managing supply and letting demand outpace availability. Its most iconic products, such as the Birkin and Kelly bags, are handcrafted, scarce, and waitlisted, which helps preserve their aura and long-term desirability. The brand’s strength lies in the emotional connection it builds with customers. Hermès objects are designed to be durable, repairable, and passed on. This commitment to sustainability is not just environmental but cultural, rooted in the idea that beauty and excellence require time. Rather than rely on celebrity endorsements or mass marketing, Hermès invests in storytelling and quiet consistency. It defines marketing as a métier rather than a promotional tool and believes that authenticity and word-of-mouth are more powerful than advertising. Hermès’ competitive moat is unusually strong and multifaceted. Its brand is synonymous with prestige, heritage, and quality, giving it unmatched pricing power and customer loyalty. By tightly controlling both production and distribution, it creates artificial scarcity and maintains full control over its brand experience. Its family ownership structure ensures a long-term focus, protecting the brand from short-term pressures and dilution. And its integrated artisan model, anchored in training, cultural transmission, and human-scale workshops, is extremely difficult to replicate at scale. The result is a luxury house with structural advantages that few, if any, competitors can match. Hermès’ pricing power is a natural result of its reputation and customer loyalty. The company raises prices modestly, often in line with input costs or currency changes, but does not depend on price increases to drive results. Its clients continue to buy because they value the product, not because of branding tactics. The brand has built multi-generational loyalty, where customers return not out of habit but because they trust the quality and ethos behind every item.

Management

Axel Dumas serves as the Executive Chairman of Hermès International, a position he assumed in 2013 after nearly a decade of leadership roles within the company. A sixth-generation member of the Hermès-Dumas family, Axel Dumas brings a unique blend of heritage, intellectual depth, and operational expertise to one of the world’s most iconic luxury houses. His educational background includes a bachelor’s degree in philosophy from Paris-Sorbonne University, a master’s degree in business law, and graduation from the prestigious Institut d’Études Politiques de Paris. He also completed the Advanced Management Program at Harvard Business School. Before joining Hermès, Axel Dumas worked as an investment banker at BNP Paribas, with postings in Beijing, Paris, and New York from 1995 to 2003. Axel Dumas began his Hermès career as an auditor and quickly moved into operational roles. He led the Jewellery division from 2006 to 2008 and later headed Leather Goods and Saddlery, the company’s most important business line. In 2011, Axel Dumas joined the Executive Committee as Managing Director of Operations, and in 2013, he became Executive Chairman. Axel Dumas’ leadership has been marked by consistency. Hermès has continued to focus on organic growth, quality over volume, and protecting the integrity of its brand. Axel Dumas has made it clear that Hermès is not run by marketing plans or short term targets. Instead, the company invests in creativity, people, and training, especially for artisans and store staff, whom Axel Dumas frequently highlights as the true stars of the business. Axel Dumas places strong emphasis on keeping the company at a human scale. Workshops are deliberately kept small, and the organization remains decentralized to preserve an entrepreneurial mindset across divisions and countries. Axel Dumas believes that culture and know how are Hermès’ most important assets, and a large part of his role is making sure they are passed on. As Axel Dumas once put it, “The only difference is that we try to remain true to ourselves when things were not going well and especially when things were going well.” That mindset has shaped Hermès’ strategy under his leadership - measured, focused, and faithful to its roots. I believe that Axel Dumas is an exceptionally good leader and the right person to lead Hermès moving forward.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Hermès has consistently achieved a high ROIC for the past ten years, with figures above 20% every year except for 2020, which was affected by the pandemic. But even during the pandemic, the company still managed to achieve a ROIC above 17%, which signals the quality of the business. There are several reasons why Hermès has maintained such a high ROIC. Exceptional pricing power. Hermès can charge premium prices without seeing pushback from customers. This is not just because of brand perception, but because the products are genuinely scarce, handcrafted, and culturally valuable. Tight control over supply and distribution. Hermès does not discount, does not use wholesalers, and owns all its retail stores. This means it captures full retail margins and controls the brand experience entirely. Disciplined capital allocation. Hermès is conservative in expanding capacity and store count. It invests gradually, ensuring new production workshops and stores maintain the same standards. There is little wasted capital or overexpansion. Most reinvestment goes into training artisans and maintaining quality. Low capital intensity relative to value delivered. Hermès’ value proposition relies more on human skill and brand equity than on physical assets or mass production infrastructure. This allows the company to generate a lot of operating profit without needing to deploy much incremental capital. Strong repeat business and durable demand. Customers often become long-term collectors. This multi-generational loyalty leads to recurring revenue without the need for heavy advertising or promotional spend, which further supports strong returns on capital. ROIC saw a small decline in 2024, which was due to increased capital investments, as capital expenditures nearly doubled from 2023 to 2024. Hermès continued to invest in expanding its production capacity and retail network. These investments, while essential for long-term growth, temporarily increased the company's invested capital base, which can dilute ROIC in the short term. Hence, the small decline in 2024 is not something that worries me.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Hermès has managed to increase its equity every year for the past decade. This steady growth is the result of strong profits, careful spending, and a conservative approach to managing the business. The company earns healthy profits each year and retains a large portion of those earnings. It uses little to no debt, so those profits are not reduced by interest payments. Because Hermès is built around craftsmanship rather than large-scale manufacturing, it does not need to invest heavily in factories or equipment to grow. It also avoids risky acquisitions and keeps its operations efficient, with a close eye on inventory and costs. All of this allows Hermès to build value gradually and consistently, year after year, while keeping risk to a minimum.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Hermès has consistently delivered a positive free cash flow with high levered free cash flow margins. Since 2021, Hermès has seen its free cash flow reach a new and higher level, and there are a few simple reasons why. First, demand for Hermès products has been especially strong coming out of the pandemic, with customers spending more across all regions. This led to a big jump in sales without the company needing to change much about how it operates. Second, Hermès has always had strong profit margins, but they reached record levels in 2021 as sales grew faster than costs. And finally, Hermès is very good at managing its day-to-day operations, like inventory and payments, which means more of the money coming in actually stays in the business. All of this has helped push free cash flow to record highs in recent years. Free cash flow reached a record high level in 2024, which is encouraging, especially considering that capital expenditures also reached a record high, which is why the levered free cash flow margin has decreased slightly. Hermès has a clear strategy on how to use free cash flow: one third goes to investment, one third to value sharing and dividends, and one third is saved so the company can weather a difficult year. Saving one third of free cash flow for difficult years may not resonate with all investors, but I personally think it is a good idea. For instance, during COVID, the saved cash allowed Hermès to avoid cutting its dividend, which it has never done. It also allowed the company to pay everyone’s salary without asking for any support from the government. The free cash flow yield has consistently been low, which means that a quality company like Hermès always trades at a premium valuation. The latest free cash flow yield suggests that the company is now trading at some of its highest valuation levels in a decade. However, we are revisiting valuation later in the analysis.

Debt

Another important aspect to consider is debt. I like to see whether a company’s debt level is manageable by checking if it could be repaid within three years using its earnings. After reviewing Hermès’ financials, it’s clear that the company is effectively debt-free. I prefer businesses with no debt, and this is another positive mark for Hermès. Given its business model and conservative approach, there is nothing to suggest that debt will become an issue for Hermès in the future.

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Risks

Succession and leadership risk is a real consideration for Hermès because so much of the company’s long-term success is built on a leadership philosophy that is rare in modern business. Under Axel Dumas, Hermès has deliberately avoided many of the common strategies pursued by other luxury brands, such as aggressive acquisitions, volume-driven growth, or chasing higher operating margins at the expense of brand integrity. Instead, the company has remained focused on craftsmanship, scarcity, and cultural consistency. This long-term, artisan-led approach has served Hermès exceptionally well, but it depends heavily on leadership that understands and values what makes the brand unique. In other fashion and luxury companies, new leaders often arrive with a mandate to boost short-term performance, whether through cost-cutting, expanding product lines, or acquiring other brands to gain scale. Axel Dumas has clearly rejected this mindset. When asked about acquisitions, he once said: “And we know how to do Hermès. I'm not sure we know how to do anything else. I'm not sure that we could buy up another company and impose on it the Hermès model. I think it will be counterproductive.” That level of self-awareness is rare, and it shows how deeply Hermès’ strategy is rooted in knowing its own limits and strengths. Axel Dumas even pointed out that others trying to copy the Hermès model often fail, because it is built on a complex balance of doing certain things extremely well and others not at all. This makes leadership succession more than just a question of competence or experience. It is about philosophy, restraint, and the ability to resist industry pressures. A new CEO - especially one from outside the family - might be tempted to modernize or accelerate growth through acquisitions or marketing-led expansion. Even subtle shifts in mindset could begin to chip away at the brand’s foundation over time. Hermès’ success comes from doing fewer things, but doing them exceptionally well. That’s not an approach that easily scales, and it’s not easy to preserve without the right leadership. As Hermès grows and becomes more valuable, the pressure to conform to typical corporate strategies may increase. The challenge for any future leader will be to maintain Hermès’ identity in a world that rewards speed, scale, and financial optimization. Whether someone else will have the same clarity and discipline as Axel Dumas is uncertain - and that’s why leadership transition is one of the few meaningful risks in the Hermès investment case.

Geopolitics is a growing risk for Hermès, and Axel Dumas has openly acknowledged it. The company’s business model depends on a very specific global structure. 75% of its products are made in France, while 90% of its sales take place outside the country. This makes Hermès highly reliant on international trade and stable cross border relations. When geopolitical tensions increase, whether through tariffs, sanctions, trade barriers or diplomatic friction, it creates uncertainty around Hermès’ ability to move products and serve customers around the world without disruption. Unlike many multinational corporations that spread their manufacturing across regions, Hermès insists on making its products in France to maintain quality and cultural consistency. This commitment reinforces the brand but also makes it vulnerable to trade disruptions. If access to key markets like China or the United States were to be restricted, either through rising tariffs, import quotas, or nationalistic shifts in consumer sentiment, Hermès could be forced to raise prices or face pressure on volumes. While the company has said it can offset tariffs through pricing power, this works only up to a point, and not all customers will continue to absorb higher prices indefinitely. More importantly, Axel Dumas has expressed that what concerns him most is not tariffs, but the broader decline in global openness and mutual trust. For a brand built on cultural exchange, travel, and appreciation of French craftsmanship, a world that is fragmenting politically and economically poses long-term strategic risks. Hermès has long believed that trade brings people together - that cultural and commercial openness enriches both sides. If that worldview fades, and countries begin to retreat into inward-looking policies, the foundations that support Hermès’ global reach could weaken. A concrete example of this risk emerged with the war in Ukraine. In response to international sanctions, Hermès closed its stores in Russia in 2022 and suspended commercial activity in the country. While this decision aligned with sanctions and corporate responsibility, it underscores the fragility of global access. Although some luxury goods still enter the Russian market through unofficial channels, this is neither a sustainable nor a reliable path for a company like Hermès, which relies on full control over its distribution and customer experience.

Counterfeiting poses a real and growing risk for Hermès, not only in terms of lost sales but more importantly in how it can impact brand perception, customer trust, and long-term value. Hermès operates in the ultra-luxury space where exclusivity, authenticity, and craftsmanship are the foundation of its pricing power. When fake products flood the market, whether they are low-quality knockoffs or increasingly convincing replicas, it undermines the very idea of scarcity and prestige that the brand relies on. Axel Dumas has addressed this issue directly, calling counterfeit products “detestable” and “really stealing the creativity of others.” Hermès takes counterfeiting seriously and has strong legal teams and systems in place to combat it. But Axel Dumas also acknowledges the complexity of the issue. Some social media users express admiration for the brand, saying they dream of owning Hermès one day, even as they share or engage with counterfeit content. While this may reflect brand aspiration, it also blurs the line between admiration and normalization of fakes. The rise of social media platforms like TikTok and Instagram has made the problem worse. Fake luxury goods are now promoted openly, often framed as affordable alternatives or fashion “dupes.” Younger consumers, in particular, are targeted by influencers showcasing replica items from third-party sites. This makes counterfeit goods more socially acceptable and fuels demand, especially in markets where authentic Hermès products are inaccessible either by price or availability. Even if customers know that a fake Birkin or watch is not the real thing, the widespread visibility of these copies can create skepticism. It may lead some consumers to question the authenticity of genuine products, even when purchased through official channels. This weakens the aura of trust that is central to Hermès’ brand and can chip away at the emotional value consumers attach to the brand. While Hermès is known for quality and not volume, the brand’s value still depends on people believing that its products are truly rare, protected, and worth waiting and paying for. Counterfeiting, especially as it becomes more sophisticated and socially normalized, threatens to dilute that perception.

Reasons to invest

Hermès’ portfolio is a strength in itself and a reason to invest. The company’s success is not built on one product or category alone, but on a carefully curated group of métiers that reflect the same values of craftsmanship, beauty, and restraint. Leather goods remain the foundation, anchored by the legendary Birkin and Kelly bags - items so exclusive that even wealth and willingness to pay are not enough. These bags are not simply purchased; they are earned through a relationship with the brand. They are handcrafted by a single artisan, with production volumes strictly limited and details about availability kept secret even from boutique staff. This level of scarcity and mystique supports unmatched brand desirability and pricing power. But what makes Hermès unique is that it does not rely on leather alone. The company has made long-term investments in jewelry, ready-to-wear, watches, shoes, and silk, allowing these divisions to grow into meaningful contributors. The goal is to build balance across the portfolio - not by weakening its strongest category, but by nurturing the others with the same care and standards. Importantly, all divisions are expected to operate with similar margins. Hermès does not push margins higher on its bestsellers or lower them to chase growth in weaker categories. This consistency means that when consumer preferences shift, the overall business remains stable and resilient. The company also avoids placing all its bets on one product within a category. For example, in leather goods, no single model is allowed to dominate. This diversification within and across divisions makes Hermès more adaptable over time, while still staying true to its identity. Whether a customer is buying a tie, a bracelet, or a couture dress, the experience and product quality are unmistakably Hermès. This balanced and deeply considered approach to building a brand - combined with iconic products that are both highly desired and hard to obtain - is a key part of what makes Hermès such a powerful long-term investment.

Hermès’ vertical integration is a core part of its strategy and a key reason to invest in the company. While many luxury brands rely on outsourced production and third-party suppliers, Hermès has taken a very different approach by controlling much of its supply chain - from raw materials to final assembly and distribution. This model gives the company several advantages that are both operational and strategic. First, vertical integration ensures control over quality, which is essential for a brand built on craftsmanship. Hermès doesn’t just design its products, it makes them, often in its own workshops, and works closely with historic partners to secure rare materials like high-grade leather, silk, and precious metals. The company continues to invest heavily in production capacity, with new leather workshops opening each year in France, and long-standing relationships with tanneries, weavers, and specialized ateliers across Europe. This level of integration helps protect the brand’s standards and ensures that artisanship is passed on and preserved. Second, vertical integration provides resilience. In a world where supply chain disruptions have become common, Hermès is less exposed than peers who depend on global outsourcing. By owning and controlling key parts of the production process, the company can better manage delivery times, maintain consistency, and avoid being caught in bottlenecks. This was especially valuable during the pandemic and continues to be an advantage as geopolitical tensions and raw material shortages affect global trade. Third, the structure supports Hermès’ long-term planning. Because it owns its production and logistics infrastructure, Hermès can make capacity investments with confidence, without the pressure to meet short-term margins. These investments, such as the ongoing development of perfume facilities in Normandy or watch and tableware production in Limoges, are designed to prepare the company for decades of growth, not just the next few quarters. This long horizon is rare in luxury and gives Hermès flexibility to grow across multiple categories while maintaining brand consistency. In contrast to many other fashion houses that chase scale through licensing or acquisitions, Hermès is cautious and focused. It invests selectively in its supply chain, not to expand rapidly, but to deepen control. For example, the company owns tanneries and textile mills and has taken equity stakes in several of its historical suppliers across jewelry, watches, shoes, and ready-to-wear. These decisions reflect Hermès’ belief that control over materials and techniques is as important as creativity.

Hermès’ store network is a reason to invest not because of how many stores it has, but because of how thoughtfully each one is developed, maintained, and staffed. The company takes a conservative approach to distribution, prioritizing the quality of the retail experience over expansion for its own sake. While other luxury brands open hundreds of stores to chase growth, Hermès has fewer stores today than it did a decade ago - yet it has grown its revenue several times over. This is because Hermès focuses on creating large and carefully designed stores that can properly showcase the full breadth of its product range. Whether it is leather goods, jewelry, ready to wear, shoes, or home items, each store is built to give space to all divisions so customers can discover and appreciate the diversity of the brand. The company does not push just the most profitable products but maintains similar profit margins across all categories to avoid distorting its long term strategy. A store is never just a sales point. It is a physical expression of the Hermès universe. The boutiques are fully owned and operated, giving Hermès full control over product presentation, customer service, and the overall brand environment. One of the most underappreciated strengths of this network is the experience and stability of its staff. Many employees stay with Hermès for ten years or more. They deeply understand the values of the house and how to communicate its heritage, craftsmanship, and product value to customers around the world. This long tenure means they do not require constant retraining or updates to align with shifting brand positions, because the brand itself is built on continuity. In an industry where many luxury stores are operated by third parties or staffed by short term workers, Hermès stands out by offering consistency, expertise, and service rooted in a genuine understanding of what the brand represents.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 43,87, which is from 2024. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 12,8% in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on Hermès' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €957,08. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Hermès at a price of €478,54 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 5.139, and capital expenditures were 1.067. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 747 in our calculations. The tax provision was 1.845. We have 104,7 outstanding shares. Hence, the calculation will be as follows: (5.139 – 747 + 1.845) / 104,7 x 10 = €595,70 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Hermès' Free Cash Flow Per Share at €38,88 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is €560,48.

Conclusion

I believe that Hermès is a great company with exceptional management. The company has built a moat through its unusually strong brand, which is synonymous with prestige, heritage, and quality, giving it unmatched pricing power and customer loyalty. It has consistently achieved a high return on invested capital, a trend that is expected to continue given its business model. Free cash flow and levered free cash flow have also been consistently strong, and this is likely to remain the case going forward. The company is also effectively debt free. Succession and leadership risk is a concern for Hermès because much of its long term success depends on Axel Dumas’ unique leadership philosophy, one rooted in restraint, craftsmanship, and cultural consistency rather than growth at any cost. A future leader might be tempted to pursue acquisitions or faster expansion, which could gradually undermine the very foundation that makes Hermès so distinctive. Geopolitics is a risk for Hermès because it produces most of its goods in France but sells nearly all of them abroad, making it highly dependent on smooth international trade. Rising tensions, sanctions, or shifts in consumer sentiment could disrupt access to key markets or force price increases, threatening a business model built on cultural openness, controlled distribution, and global consistency. Counterfeiting is a risk for Hermès because it undermines the brand’s core values of exclusivity, authenticity, and craftsmanship. As fake products become more visible and socially accepted, especially on platforms like TikTok, they threaten to erode the trust and emotional value that make Hermès products so desirable and justify their premium pricing. Hermès’ portfolio is a reason to invest because it is built on a carefully balanced range of divisions that all reflect the same values of craftsmanship, scarcity, and quality. While the Birkin and Kelly bags anchor the brand with unmatched desirability, Hermès has successfully grown other categories like jewelry, ready to wear, and watches, each held to the same standards and operating with similar margins. This ensures diversification and resilience without compromising its identity. Hermès’ vertical integration is a reason to invest because it allows the company to control quality, preserve craftsmanship, and reduce reliance on third parties, ensuring consistency across all products. By owning key parts of its supply chain and investing in long term production capacity, Hermès is more resilient to disruptions and better positioned to grow while staying true to its identity. Hermès’ store network is a reason to invest because it prioritizes quality over quantity, with each boutique carefully designed to reflect the full brand universe and operated entirely in house. With experienced staff and a focus on brand integrity rather than rapid expansion, Hermès creates a retail experience that deepens customer loyalty and supports sustainable growth. I believe Hermès is a fantastic company, and buying shares at the intrinsic value of the Ten Cap price of €1.191 would be a great long term investment. That price may never be reached, and for those investing with a long time horizon, it may be worth buying shares above that level. Hermès is the kind of company that I believe can compound over decades.

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