BIRD - Allbirds: The Sneakers Made Of Clouds

2023-05-12 01:10:40 ET

Summary

• Allbirds created sneakers that quickly became synonymous with comfort.
• The company went public in 2021 at a $4 billion market cap that has since declined to $188 million.
• Its cost-saving plan is progressing and Allbirds is on track for $35 million to $45 million in annualized cost savings by 2025.
• Cash and equivalents as of the end of its fiscal 2023 first quarter provide a two-year cash runway against current operational cash outflows.

San Francisco-based Allbirds ( BIRD ) was founded in 2014 and would quickly move to establish an almost cultlike following from sneakers that customers sometimes described as though they were made from clouds. Allbirds set out to develop shoes that placed comfort first and were built with natural materials that were significantly more sustainable than comparable alternatives. Merino wool hugs your feet from the sole and is flanked at both sides by eucalyptus tree fiber knit fabric and a sugarcane-based EVA foam. The company exploited a gap in the market for simple eco-friendly and comfortable sneakers.

Hence, their move from a Kickstarter campaign in 2016 that raised just under $120,000 to a 2021 IPO that would see its stock price surge nearly 100% to close at a valuation north of $4 billion came as no surprise to those who followed their growth. The company's New Zealand founders set out to bring their Merino wool to the world and they achieved this with a direct-to-consumer model that avoided wholesale losses to middlemen. However, the growth story has since been entirely disrupted and the company's future now seems bleak.

Net Losses And Cash Burn Form A Substantial Headwind To Valuation Expansion

Common shares have been in freefall, down around 71% over the last year and around 95% since 2021. Bears who form the 9% short interest in Allbirds think there is more hurt ahead with continued losses set against a declining cash position. However, the company's current price-to-sales multiple sits at 0.65x , around 23% lower than its peer group median and at a marked difference to 2022 when it traded at a 1.6x multiple for much of the year. Hence, bulls will be hoping that the selloff has overextended itself with a potential multiple expansion in play.

At the core of the headwinds facing Allbirds is the mismatch between its current cash reserves and operational cash outflows. Cash and equivalents as of the end of the company's recently reported fiscal 2023 first quarter were $143.3 million, down from $239.7 million in the year-ago quarter. This was set against an average quarterly operating cash burn of $17.8 million for the last four quarters. Assuming Allbirds maintains its current quarterly pace of cash outflows, the company would run the risk of running out of cash in around 8 quarters. Critically, whilst such a worst-case scenario is unlikely against the ongoing efforts by management to reduce their cost footprint and tap new sources of liquidity, it presents a major barrier to valuation expansion.

Indeed, the era of cheap capital has come to an end on the back of a Fed funds rate that has been hiked to its highest level since 2008. The euphoria that defined much of the pandemic is now firmly in the rearview and Allbirds will likely trade in the current low multiple until a switch to profitability moves it out of the risk-off sentiment bracket that will likely continue to define the stock for much of 2023.

Revenue came in at $54.4 million , a 13.3% decline over the year-ago comp but still a beat by $6.44 million on consensus estimates. Negative FX movements were partially to blame but lower consumer demand for the sneakers against stronger year-ago comps led to much of the decline. However, the company continues to expand to new markets including Japan where it realized 50% organic revenue growth.

Comfortable Shoes And Uncomfortable Losses

Gross profit margins at 40.1% fell from 51.9% in the year-ago quarter as it was heavily impacted by promotional activity and inventory markdowns. Whilst Allbirds did not provide guidance for the full year, second-quarter revenue was guided to come in the range of $64 million to $69 million, a decline of around 19% at the top end. Allbirds has made progress with its cost-cutting efforts with quarterly cash burn down 50% year-over-year. Hence, its cash runway stands to be significantly expanded as this continues to feed through to earnings. Current operations are on track for roughly $35 million to $45 million in annualized cost savings by 2025. Management has also expanded its undrawn revolving credit facility with JPMorgan to provide $50 million of committed funds.

Allbirds also released the $145 Golf Dasher, its first golf shoe some days ago in response to customer requests. Whilst this won't revive flagging revenues, it's part of a broader strategy by management to support revenue even as they're in retreat. Should you take a position in the commons? No. Allbirds is part of a larger cluster of unprofitable companies facing revenue headwinds as inflation and interest rates partner to disrupt the economy. However, this is a hold against a strong liquidity position that provides time for the company to realize the full extent of its cost savings.

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