BIRD - Allbirds - Comfy Yet Chaotic

2023-11-29 18:26:07 ET

Summary

• Allbirds, a global footwear and apparel company, may not be a good investment despite its popular products.
• The company's focus on sustainability and use of recycled materials is commendable but not a competitive advantage.
• Allbirds faces risks such as intense competition, a challenging macroeconomic environment, and potential leadership failures.

A great product does not always equate to a great investment. Many investors have been burned by companies with stellar products and then the investment failed to materialize for one reason or another.

I am a big fan of Allbirds ( BIRD ) shoes but after researching this company I’m quite bearish on the near-term outlook of this organization. Despite having some comfy kicks, investors may wish to avoid this company for reasons I’ll get into shortly.

The Company

Allbirds, Inc. ( BIRD ) is a global footwear and apparel company that is focused on making sustainable products. As stated on the company’s 10K statement, Allbirds is a brand that, “…innovates with naturally derived materials to make better footwear and apparel products in a better way, while treading lighter on our planet.”

Allbirds was founded by Tim Brown and Joey Zwillinger. Brown got the idea of creating a better shoe while as a vice captain of a New Zealand football team. He received a research grant from the New Zealand wool industry to engineer a sneaker. It was after creating a Kickstarter campaign that Brown teamed up with Zwillinger, a biotech engineer and expert in sustainable materials.

The company’s first product was the Wool Runners, which at one point was dubbed the “ World’s Most Comfortable Shoes .” With the success of the Wool Runners, Allbirds has since created various other shoes as well as apparel. I’ve purchased the Wool Runners as well as a few other shoes from Allbirds and can emphatically state they know how to create great shoes. They look good and are extremely comfortable.

Allbirds went public in 2021 and the stock surged over 90% on their first day of trading. However, it’s mostly been bad news since then for the organization. Similar to Peloton ( PTON ), Allbirds was too aggressive as they tried to grow too quickly as they spent significant funds to work on new shoes and expand the business by opening more retail locations.

This year the organization’s strategies as well as the senior leadership team changed dramatically. Brown and Zwillinger were co-CEOs and now Zwillinger will be the organization’s sole CEO as Brown transitions to Chief Innovation Officer. Additionally, the company’s CFO quit earlier this year and that role has now been filled by Annie Mitchell.

In May, Allbirds let go numerous employees and now is focusing on their “core” consumers.

Moat and Opportunity

As stated on a recent investor presentation, Allbirds believes their core demographic is young (mid 30’s), skews female, is active and adventurous, cares about the environment and making a positive impact and lastly is partial to premium products.

I believe Allbirds biggest differentiator (aside from comfort) is their focus on sustainability. Allbirds proudly states it is a Certified B Corp which means the business has the highest standards when it comes to the environment. Allbirds uses numerous recycled materials in their products and packaging.

As you can see below, the company has made significant strides to reduce their carbon footprint as Allbirds has a goal to cut their carbon footprint in half by 2025 and reduce it to near zero by 2030:

Regarding the brand, Allbirds does have one of the highest net promoter scores within their peer group and 96% of Allbirds consumers stated they would purchase again.

Although Allbirds efforts regarding sustainability are certainly commendable, I don’t believe using renewable or environmentally friendly materials is a competitive advantage. Especially considering other shoe brands are making strides to use renewables materials as well. For this reason, I don’t believe Allbirds has a moat.

I believe Allbirds has an opportunity to grow brand awareness both domestically and internationally. The company must focus on their “core” consumers and build relationships with third party vendors and distributors. Allbirds has made progress as the company has recently completed two international distributor deals in Canada and South Korea. Additionally, the company has made progress with quality partners such as Dick’s Sports Goods, Nordstrom and Scheels.

Going forward, I'm of the expectation Allbirds will follow in the footsteps of Under Armour. Once viewed as high-quality product, Under Armour attire was heavily discounted and started being sold in many retail clothing stores. As this past Black Friday indicated Allbirds relied heavily on promotions and I wouldn't be surprised to see this continue or have prices on Allbirds shoes decline. The company began selling on Amazon and I imagine more partnerships will deliver which will alter the image of the brand.

Management

As I’ve noted above, the company was founded by Tim Brown and Joey Zwillinger. Both acted as co-CEOs until this year when Brown transitioned to Chief Innovation Officer.

As you can see from these Glassdoor ratings , the company isn’t receiving rave reviews with a mere score of 58%:

Some of this may be due to working in retail and some due to negative reviews associated with the recent layoffs.

Most of my readers will know that I am a big fan of founder led organizations. These companies take a long-term view and focus on maximizing shareholder returns instead of short-term profits. These two co-founders have amounts of both Class A and Class B Common stock so you can be assured they are focused on driving the business forward in the years to come.

Financials

As you can see from the latest annual report , the company’s income statement is not painting a rosy picture:

Despite revenue increasing, SG&A has surged over the years as the company’s net loss has grown larger every year.

In Q3 2023, the company generated net revenue of roughly $57 million which was a decrease of nearly 8% compared to Q3 2022. In some positive news, the company reduced their ending inventory levels by 37% compared to prior year third quarter and the organization significantly reduced the amount of operating cash used.

Turning to the balance sheet, the company has roughly $132 million in cash and cash equivalents as of Q3 2023. This figure is far below the cash balances the company held at December 2022 which was roughly $167 million and $288 million as of December 31, 2021. However, the company does not see a need for capital in the foreseeable future. Allbirds doesn’t have significant liabilities as you see below for their current Balance Sheet as of Q3 2023 :

Allbirds has also a credit agreements with JPMorgan Chase and has slowed their rate of cash burn which is why the organization isn’t too concerned about liquidity at the moment.

Risks

Allbirds lists numerous risks to the business on their 10K statement . I’m going to discuss three risks which I believe could hurt the organization.

First, it’s an extremely competitive market and as I’m mentioned above, I don’t believe Allbirds has a moat. Allbirds competes with Nike ( NKE ), Adidas, On ( ONON ), Hoka, Crocs ( CROX ), and soon Birkenstock. I think Allbirds differentiates itself in terms of being a sustainable shoe as well as perhaps a shoe for runners. Yet, I don’t believe it’s a top tier running brand (not like Hoka, Brooks, or Nike) and I’m not particularly sure sustainability is the top reason a consumer would purchase a shoe. From the online research I'm conducted, Allbirds isn't viewed as favorably as many of the brands mentioned above.

Although I think Allbirds is targeting earners with a higher income given the characteristics of their core clientele I think this macro environment isn’t great for consumer spending. Credit card debt is at an all-time high and many Americans will have to resume paying off their student loans. In this type of economy, I think it will be harder for consumers to have extra cash to splurge on shoes that are $100 or more.

Lastly, there is a chance the senior leadership team fails to execute on their strategies. The CFO is new and both Brown and Zwillinger made some significant missteps as they burned through cash without regard to profitability all from the sake of growth. It’s clear these co-founders can create a wonderful shoe, but can this duo create a wonder business? Only time will tell.

Valuation

As you can see from the below valuation metrics from Seeking Alpha, the overall value grade for Allbirds is a “A-.”

As Allbirds is unprofitable, I think price to sales is the best metric to view this organization.

In this case, Allbirds appears to have a low price to sales ratio compared to peers in this sector. Currently, this seems like a fair valuation for the stock. If you are a believer this company will turnaround it seems like a reasonable price to play for the stock. However, I'm not so sure the company can make sure a pivot in the near term.

Conclusion

Allbirds knows how to make an excellent shoe and it is certainly admirable the way the organization is using recycled materials as they look to decrease their carbon footprint.

However, I don’t believe the company has a moat and more and more companies are focusing on ESG standards and reducing their carbon footprint.

Also, despite the company having co-founders still at the helm I’m reluctant to state these are the leaders the organization needs to be successfully. The cash burn and growth at all cost decisions were shortsighted. I do like the strategy to focus on core consumers and generate profitable growth. I think Brown and Zwillinger can make a darn good shoe but that’s all I know at this moment.

Given the turmoil with the organization over the last year, the decline in revenues and the difficult economic conditions facing consumers I’m hard-pressed to believe Allbirds will turn things around anytime soon.

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