Birkenstock: Aggressive Growth Trajectory Continues (NYSE:BIRK)

Though the overall stock market remains expensive and jittery ahead of a year that will largely be dominated by news of the Fed’s proposed interest rate cuts, it’s never a bad time to lock in long-term positions in stellar companies with fantastic growth trajectories.

And to me, one unconventional investment that investors should consider is Birkenstock (NYSE:BIRK), the eponymous shoemaker that went public late last year at $46 per share. Unlike many other IPOs, Birkenstock has failed to rally meaningfully beyond its starting price, as investors have weighed the strength of the company’s growth metrics against a valuation that already looks, at best, fair.

I bought Birkenstock shortly after its IPO, and I last wrote a bullish note on the stock earlier this year. Since then, Birkenstock has released strong Q4 results that showed progress on many key metrics. In particular, I find it very encouraging that Birkenstock is growing its direct-channel sales mix aggressively, which is an important lever to improving gross margins over time and reducing its reliance on discounted trade sales. In addition, the company continues to use its cash flow generation to reduce its debt leverage, decreasing interest payments over time. Given this and a number of other factors, I remain bullish on Birkenstock for the balance of the year.

As a reminder for investors who are newer to this stock, here is what I view to be the core bullish drivers in Birkenstock:

• Incredible growth trajectory, with plenty of expansion opportunities in Asia. Despite having been in existence since 1774, Birkenstock has recently entered into a multi-year growth trajectory above 20% y/y. It has a wide array of both shoes and sandals for men, women, and kids, giving it a broad global TAM. In addition, relatively low penetration in high-growth Asian markets gives it an important focus driver for growth in the near term. Asia is growing at a >50% y/y clip, far outpacing the broader company.
• Broad product portfolio. Birkenstock makes sandals, shoes, and accessories; across men’s, women’s, and kids. It also has products across the spectrum of price points.
• Cross-sell. The company notes that the average U.S. consumer who is a Birkenstock customer owns 3.6 pairs of Birkenstocks, demonstrating incredible brand engagement and loyalty.
• Efficient marketing. Management also notes that the majority of new Birkenstock customers come in via word of mouth and other unpaid channels.
• Stellar margin profile. Birkenstock boasts a gross margin profile in the low 60s, which makes this shoemaker closer to a tech stock than its peers in retail and consumer goods. The combination of a very high gross margin plus double-digit revenue growth gives Birkenstock an extended runway for incredible profit growth in the near to mid-term timeframe, especially as the company uses its IPO proceeds to expand its store footprint and grow more in under-penetrated regions like China.

From a valuation perspective: at current share prices near $47, Birkenstock trades at a market cap of $8.87 billion. After we net off the €169.4 million of cash and €1.32 billion of debt on the company’s most recent balance sheet (or roughly $1.24 billion in net debt, on dollar terms at $1.08 to the Euro), the company’s resulting enterprise value is $10.11 billion.

Meanwhile, for the current fiscal year, Birkenstock has guided to €520-530 million in adjusted EBITDA ($567 million in dollar terms at the midpoint), putting the company’s valuation at 17.8x EV/FY24 adjusted EBITDA. No, this isn’t cheap: but given 20%+ revenue growth and the potential for margin expansion down the line (given growing DTC mix and manufacturing capacity expansion plans), I’d say there’s quite a hefty potential for upside down the line.

Stay long here: Birkenstock, in my view, will continue to quietly exceed expectations and grow into its premium valuation.

Q4 download

Let’s now go through Birkenstock’s latest quarterly results in greater detail. The Q4 earnings summary is shown below:

Birkenstock’s revenue grew 22% y/y to €303 million, again exceeding its target of maintaining a growth CAGR above 20% y/y. The chart below, meanwhile, shows Birkenstock’s growth by region. Asia is the leading growth region, up 51% y/y (while representing only 13% of total revenue), while Europe is also leading with 33% y/y growth.

We also note that Birkenstock’s revenue growth is impressive given soft macro environments in both Asia and Europe, reflecting the fact that the company is well-cushioned against macro cycles. Note too that direct-to-consumer revenue grew 30% y/y and now represents 53% of revenue, an important catalyst to margins going forward.

Underneath the top-line results, Birkenstock notes that unit sales grew 6% y/y, while ASPs grew 14% y/y, reflecting the company’s successful upward moves in pricing.

Now, adjusted EBITDA margins did soften somewhat in the fourth quarter, down to 26.9% – 220bps weaker y/y.

The majority of this margin slippage, however, is due to explainable factors: a planned factory expansion that will help boost Birkenstock’s scale and gross margins over time, and a 110bps hit from FX movements in the Euro. On a nominal basis, Birkenstock’s adjusted EBITDA still grew 12% y/y to €81 million. The company also still expects adjusted EBITDA margins to hover at 30% this year, implying that margins will continue to gain leverage throughout the balance of the year.

Lastly, we also note that Birkenstock has paid down a substantial amount of debt and reduced its leverage to 2.6x of adjusted EBITDA, which will help slim down interest costs over the long haul:

Key takeaways

With encouraging growth metrics, a huge gross margin profile, and catalysts for further profitability expansion, there’s a lot of reasons to like Birkenstock, even at a ~18x adjusted EBITDA multiple. Stay long here and continue to invest in this two hundred-year old shoemaker as it attempts to capture a massive greenfield market in Asia.