BIRD - Allbirds: Not The Right Time Despite Ongoing Initiatives

2023-07-26 22:49:11 ET

Summary

• BIRD has seen its share price drop by 93% since its 2021 IPO, with shares now trading at around $1.56.
• Risk remains high. Losses have grown out of control and aggressive retail expansion strategy has not been paying off.
• Despite the ongoing initiatives to improve cost structure, there's limited chances of upward price action in FY 2023 in my opinion. I rate BIRD neutral.

Allbirds (BIRD) is a popular sustainable footwear and apparel company that has gained significant attention for its environmentally friendly products and commitment to sustainability. BIRD was founded in 2016 with the goal of creating comfortable and eco-friendly shoes using innovative materials.

The company went public in 2021 when its share price reached an all-time high of ~$26 per share. Since then, shares performance has been underwhelming. Following a gradual decline, BIRD is now trading at ~$1.6 per share, down almost ~93% from the all-time high.

I give BIRD a neutral rating. Risk remains high, and my target price model suggests that there may be very little chance of upward price action in FY 2023.

Risk

I consider BIRD a high-risk opportunity. In my view, it is probably challenging to justify investing in BIRD at this time - the verdict is that BIRD remains far away from breakeven while growth may continue to be weak for the FY.

In fact, BIRD has struggled to achieve profitability and generate positive operating cash flow / OCF since IPO. As such, despite the transformation initiative , I would continue to be cautious about the unproven track record in profitability and cash flow generation.

While temporary losses would probably be inevitable for emerging Direct-to-Consumer / D2C brands in the investment phase like BIRD, the amount of losses seems to have grown out of control. In just over two years, EBIT loss margin significantly contracted from negative 20% to over negative 65%. Even if add-backs such as share-based compensation / SBC and depreciation & amortization / D&A are included, BIRD still sees negative adjusted EBITDA.

Adjusted EBITDA loss margin has widened to ~40% in Q1 from ~20% at the same time last year. Much of these have been caused by the very elevated SG&A expenses as the main consequence of what seems to be retail overexpansion under a challenging macro environment.

BIRD has been expanding its retail footprint aggressively, where it has almost tripled the number of stores in just two years. Unfortunately, though, these significant investments have not been paying back so far. Given the challenging macro situation that has depressed spending levels for items like footwear and apparel, growth has been muted. BIRD’s quarterly growth has significantly declined from over 30% in May 2021 to ~15% in most of 2022. It would then decline to negative 13% in the most recent quarter in Q1 2023.

As such, I have the impression that the decision on retail expansion did not seem to be well thought through. Even in Q1 alone, when BIRD already made a conscious decision to appoint a new CFO and roll out a strategic transformation plan, it still spent twice as much on SG&A as it made in gross profit. This has eventually been putting pressure on BIRD’s cash flow generation. Having been a negative cash-flow company, BIRD has mostly been relying on the capital raised at the IPO to sustain its operations. Since the IPO, cash position has gone from ~$288 million to ~$143 million in Q1, an over 50% decline.

I would expect BIRD to continue seeing significant adjusted EBITDA loss in FY 2023. Though it is understood that the figure may see an improvement from Q1’s, I would also note that BIRD may continue its promotional activities in Q2 and beyond, as it needs to rightsize its inventory level to adjust to the weak macro, effectively temporarily pressuring gross margin and overall profitability.

Catalyst

I believe that near-term catalysts remain minimal - as of today, I don’t see any clear reason why investors would consider BIRD an immediate investment opportunity.

Longer term, though, I may anticipate BIRD benefitting from a few ongoing initiatives to improve its cost structure. Furthermore, while it is too early to judge, I would also give the newly-appointed CFO the benefit of the doubt that she would successfully lead the team to execute these initiatives.

Overall, two key initiatives may help BIRD reduce its cost of production / COGS as well as SG&A expenses - moving some of the manufacturing activities to lower-cost geographies such as Vietnam, and also possible workforce reduction further.

BIRD stated in Q1 that it expects to realize annual COGS savings of $20 million - $25 million and also SG&A savings of $15 million - $20 million. Now, I feel that the target sounds a little ambitious given the most recent snapshot in Q1. Moreover, even if BIRD can secure $45 million of annual cost savings in FY 2023, which implies a contribution to a ~45% improvement in adjusted EBITDA based on FY 2022’s numbers (all things equal), financials will still be in the negatives for FY 2023.

However, it is far more important for BIRD to demonstrate how its ongoing activities may lead to a path to profitability to strengthen investors’ beliefs in the business. In fact, given the structural nature of the cost-saving initiatives, I may anticipate a small-scale recovery in share price once BIRD sees early signs of success from the initiatives.

Valuation / Pricing

My target price for BIRD is driven by the following assumptions for the bull vs. bear scenarios of the FY 2023 target price model:

1. Bull scenario (50% probability) assumptions - BIRD to deliver revenue of ~$282 million, a -5% YoY decline, at the highest end of the market expectation . I assume P/S to improve slightly from today’s level to ~0.86x to reflect the potential improvements in cost structure due to cost saving initiatives.

2. Bear scenario (50% probability) assumptions - BIRD to deliver revenue of ~$240 million, an 19% YoY decline, below the lowest end of the market expectation. P/S to stay where it is today without any expansion.

Consolidating all the information above into my model, I arrived at an FY 2023 weighted target price of ~$1.43 per share. Since BIRD is trading at ~$1.54, the stock appears overvalued.

I would rate the stock neutral. Overall, the target price model also seems to suggest very little possibility of upward price movement in FY 2023 given the challenging macro and the inward focus on improving its cost structure. This alone means that today may not be the right time to invest in BIRD. Alternatively, it would probably be ideal to revisit the opportunity towards the end of FY 2023, when we can have more clarity on the result of BIRD’s execution of its strategic initiatives.

Conclusion

I rate BIRD neutral due to the high level of risk and limited chances of upward price action in FY 2023. Investing in BIRD at this time may be challenging, given its distance from breakeven and the potential weakness in growth for the full year. Near-term catalysts are minimal, suggesting that there is no clear reason for investors to consider BIRD as an immediate opportunity. However, in the longer term, the company may benefit from ongoing initiatives aimed at improving its cost structure. Based on my calculations, the target price for FY 2023 is approximately $1.43 per share, Since BIRD is trading at ~$1.54, it appears overvalued.

For further details see: