BIRD - Allbirds: A Sustainable Casual Wear Company Poised For Growth

2023-05-12 03:53:00 ET

Summary

• Allbirds, Inc. is a prominent player in the production of sustainable casual wear, health and wellness, e-commerce, and sportswear.
• The global footwear market is expected to reach $360.6 billion by 2027, providing a large growth opportunity for Allbirds.
• BIRD distinguishes itself from competitors by using minimalist and long-lasting product designs, innovative materials, and a digital-first approach across all channels.

Investment Thesis

Allbirds, Inc. ( BIRD ) is a prominent player in the production of sustainable casual wear, health and wellness, e-commerce, and sportswear. BIRD distinguishes itself from competitors by using minimalist and long-lasting product designs, innovative materials, and a digital-first approach across all channels. I expect the company to continue to achieve annual growth rates of 20-30% in the medium term, supported by a large TAM and the continued success of the company's core offerings, such as the Wool Runner. Hence, I view BIRD stock as a long-term buy.

Sales Growth Poised to Continue at a Fast Pace in an Attractive Market

Allbirds' footwear gains could be driven by a shift back to its core offerings, moving away from recent expansion into new silhouettes and seasonal colors that didn't resonate well with shoppers. Its first lifestyle shoe, the Wool Runner, was dubbed the most comfortable, and a curated color offering can aid lifestyle footwear sales. Continued success with its Dasher line might spur performance-footwear gains, which lets the company tap into the largest sports-shoe segment, which could reach $196 billion by 2030. The global footwear market may reach $360.6 billion in 2027 vs. $196.5 billion in 2020, according to business wire. Allbirds has less than 1% of the market share, which provides a large runway for growth.

Allbirds' purpose-led, environmentally friendly business model, coupled with an expanding physical footprint, could almost double sales by 2025 vs 2021, based on consensus estimates. Though currency headwinds and inflation pressured 2022 sales, I believe strong digital and store growth may drive high-teens to low-twenties gains in the next few years, in line with Allbirds' medium-term target of 20-30% annually. The company operates only 51 shops today, far below its peers, giving it room to expand. Store growth abroad could aid international gains as brand awareness and website traffic have increased in regions where new stores have opened.

Focus on Five Regions to Spur Overseas Gains

I believe Allbirds' focus on five markets abroad -- China, Japan, the UK, Germany, and Canada -- could lead to double-digit international sales gains in the next few years. Longer term, international could become at least as large as the company's US business, according to the management. China was Allbirds' largest foreign market in 2022 , and as the region slowly recovers from lockdowns and its consumers become more environmentally conscious, sales growth there could accelerate. While economic headwinds may buffet overseas sales in the near term, Allbirds believes it has a first-mover advantage for sustainable athletic wear abroad. As international becomes a larger part of sales, margins may benefit since the segment is more profitable than Allbirds' US business, with China leading the way.

Execution to Determine Success of Apparel Reset

A sharper focus and refined apparel offering, if executed properly, could help broaden Allbirds' reach and improve profitability. The key is to narrow its strategy to a simplified line-up of more evergreen lifestyle apparel. Allbirds has struggled to accelerate apparel -- launched in 2021 --- beyond T-shirts, underwear and socks. The expansion into leggings, an already competitive category, was unsuccessful. The company needs to look beyond narrow use-case clothing. If Allbirds can boost its apparel business, it can lift profitability since apparel is a higher-margin business vs footwear. Leveraging its existing proprietary materials and fabrics used in footwear is key to increasing its share in the global sports-apparel market.

Financials: Cost Cuts Can Drive Positive EBITDA Margin

Allbirds' cost-savings program, an international distributor model, and shift to making all footwear in Vietnam are catalysts for expanding margin. Lower warehousing and return-processing costs may also help, but elevated discounts in 2023 will continue to weigh on gross margin, in my view.

Allbirds' new cost initiatives, including tighter inventory management and an international distribution model, coupled with its completed simplification drive from 2022, could lead to $35-$45 million in savings in 2023-2025. Of that, $20-$25 million may come from reducing the cost of goods sold and $15-$20 million from lower SG&A. Allbirds' initiatives in 2022 already saved $13-15 million, and since they were announced, warehousing expenses fell by the mid-teens and return-processing costs dropped by about 40%. These savings may drive cash-flow profitability and positive adjusted EBITDA in 2025.

Valuation & Risks

Allbirds' valuation in the athleisure peer group may be bolstered by the chance to gain share in the $304 billion sportswear market . With just under $300 million in sales vs Nike's (NKE) more than $40 billion, it's in the early stages of growth. Allbirds' vertically integrated, largely e-commerce business, coupled with its focus on sustainable materials in all of its products, differentiates it from Nike, adidas (ADDYY) and Under Armour (UAA). Its minimalistic yet sleek footwear designs are appropriate for multiple occasions. My December 2023 price target of $2.2 is based on 0.8x applied to the FY23 sales estimates. I believe my assumed multiple is more in line with other consumer growth stocks.

Allbirds is still an early-stage company, and there are some risks attached to investing in the company's stock. Given the competitive nature of the market, Allbirds may require more promotional selling as the company expands its product range, which could delay profitability further. Moreover, larger and well-capitalized players, such as Nike and Adidas, investing in similar natural and sustainable materials could impact Allbirds' competitive positioning as the company does not hold patents on their materials or design.

Conclusion

Allbirds' vertically integrated, largely e-commerce business, coupled with its focus on sustainable materials in all of its products, is a differentiating factor for the company vs other large peers. The company's sales growth is poised to continue to grow at a fast pace, driven by a renewed focus on core offerings, potential gains in performance footwear and a purpose-led, environmentally friendly business model. The company's international expansion in five key regions, including China, remains key to driving double-digit growth in the next few years. Moreover, Allbirds' cost-saving initiatives also remain positive for achieving positive adjusted EBITDA by 2025. Hence, I believe the stock is a buy and a long-term hold.

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