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When Birkenstock (NYSE:BIRK) went public in October of last year, I concluded that sandals were on sale, as shares fell by double-digit percentages coming out of the IPO gate. Despite this decline, while opening days are usually characterized by decent gains, valuations were still very demanding, likely the reason for caution displayed by investors. Even after this latest setback, expectations remain very elevated and continue to drive me away from the stock.
German Footing
Birkenstock is a German-based global brand with a very strong heritage, going back all the way to 1774, known for its quality and functionality, inspired on the belief that humans are intended to walk barefoot on natural yielding grounds.
On this belief, Birkenstock has developed a broad range of foot-based products, including the traditional models as well as a new range of styles, with buyers and users appealed by the quality of the products, a near 100% German-based product.
A family owned and led business saw some changes during the 2010s as the company announced its first outside management, with its current CEO Oliver Reichter taking the reins in 2013. This has been a very successful move, as sales quadrupled from EUR 300 million in 2014 to EUR 1.2 billion in 2022.
Despite its rapid growth, Birkenstock is still a small and very much niche player in an over EUR 300 billion global footwear market, leaving ample growth opportunities. With consumers opting for healthier and better products, emergence of casual of clothing in various occasions, and appreciation for craftsmanship on the rise, continued growth prospects of the business look good.
With the company having a strong presence in North America, as well as Europe and Asia-Pacific, I was somewhat surprised to see a greater customer base among females. In terms of age and income cohorts, diversification is quite nice, as a 40% direct-to-consumer business is very impressive, and more profitable for the business as well.
IPO & Valuation Considerations
Birkenstock sold 32 million shares at $46 per share (ahead of the green shoe option) although that not all proceeds benefited the company with some proceeds going to selling shareholders. Corporate proceeds were used to reduce net debt, seen around EUR 1.1 billion on a pro forma basis.
At $46, the company granted an EUR 8.1 billion equity valuation, or EUR 9.2 billion enterprise valuation. This was based on business which grew 2022 sales (ending in September that year) by 29% to EUR 1.24 billion, with operating profits reported at a very decent EUR 363 million.
Ahead of the IPO, revenues were reported up 22% for the first nine months of 2023, reported at EUR 1.12 billion, for a run rate around EUR 1.5 billion. Operating profits of EUR 235 million were actually down a bit, attributed to foreign exchange losses.
While a fall to $40 on the opening day of trading cut the valuation by about a billion Euro, these valuations were still very demanding at over 5 times sales. Based on operating profits of around EUR 380 million, interest costs and tax rates, I pegged net earnings potential at around EUR 225 million, equal to about EUR 1.20 per share, yielding a mid-thirty times earnings multiple.
This made me very cautious, as Crocs (CROX), being the best purely listed peer I could think of, commanded a mere 2 times sales multiple, with margins being largely similar, making it very easy for me to avoid the shares.
Doing Reasonably Well
Since IPO day, shares have initially traded in the mid-thirties, but shares recovered to the $50 mark in recent weeks, as the first quarterly earnings report post the public offering sent shares down by nearly double-digit percentages to $46 per share.
After posting 22% revenue growth for the first nine months of the year, fourth quarter sales growth slowed down to 16% and change, with revenues reported at EUR 375 million. GAAP operating profits fell to just EUR 25 million, actually resulting in a GAAP loss, but this could be explained by substantial one-time costs related to the IPO, although some kind of structural stock-based compensation expenses will be expected as well going forwards of course.
For the year, revenues were up 20%, with some of the growth driven by pricing, as volumes were up 6%. Adjusted earnings for the year were reported at EUR 207 million, equal to EUR 1.10 per share.
While the growth slowdown was not too comforting for investors, it is a 2024 revenue guidance which calls for sales around EUR 1.75 billion which looks rather comforting, up 17-18% from 2023. Adjusted EBITDA is seen at a midpoint of EUR 525 million, up just 9% from an EUR 483 million number in 2023, due to some costs related to investments into the business, but these remain very impressive margins by all means.
And Now?
By now, the share count is quite a bit bigger than anticipated, in part due to the overallotment option. The 187 million shares now trade at $46, for an $8.6 billion equity valuation. Net debt was reported at nearly EUR 1.5 billion, but this was ahead of the offering, as the company claims that net debt is down to 2.5 times EBITDA. This suggests that the enterprise valuation still come in close to EUR 10 billion, with pro forma net debt still exceeding the billion mark post the offering.
The problem remains with the earnings, or better said valuations. While the company proudly claims an EUR 1.10 per share earnings number, those adjusted earnings of EUR 207 million exclude for quite some items. While I am happy to adjust for currency losses and IPO related costs, an EUR 65 million stock-based compensation expenses should not be adjusted for. A big chunk of this was related to the IPO, but likely these will remain more elevated post the offering. Believing they might run around EUR 50 million (to be seen in the coming quarters) that would hurt earnings by another quarter of a dollar or so, making that earnings multiples remain sky-high, with realistic earnings seen below a euro per share.
Stepping Aside
With the share price having recovered since IPO day, dilution makes the share count bigger than I expected, and earnings being quite adjusted, I find it perfectly easy to avoid the shares here, even though the 2024 outlook looks quite decent. Nonetheless, with realistic earnings trending below a euro per share, the valuation is far too demanding to get anywhere near upbeat here, in what otherwise seems to be a great business and growth opportunity, just trading too extended here.
