Summary
- Allbirds has seen a dramatic decline in its share price since the IPO.
- The company is seeing major revenue deceleration and increased losses, which raises the risks related to balance sheet and liquidity.
- Management sets its sight on various growth opportunities including international markets, but we view that such strategy will be difficult to execute.
- We are recommending a "SELL" on this stock as of this time.
Company Overview
Allbirds, Inc. (BIRD) is a global lifestyle brand that sells footwear and apparel products in a more sustainable fashion. The company sources fine natural ingredients like merino wool, eucalyptus tree fiber knit fabric, and a sugarcane-based EVA foam (SweetFoam®) to create differentiated products for consumers. The company currently has presence in 35 countries through its e-commerce platform and has a handful of Allbirds retail stores globally, with locations in the US, UK, Europe, China, Japan, and South Korea. The company completed its Initial Public Offering in November of 2021 at a valuation of $15 per share. Since then, the company has seen its stock price drop dramatically by roughly 80% of the IPO price. Year-to-date, the company's stock price has seen a decline of -78.38% compared to S&P 500's decline of -21.86%.
Mixed Q2 Results
For Q2 2022, Allbirds posted mixed financial results, with top line growth but increased losses on a year-over-year basis. Allbirds posted a net revenue of $78.2 million which presented a 15% growth on a year-over-year basis. The growth, though meaningful, is a severe deceleration in growth from the year before, when Q2 2021 earnings presented a 46% growth on a YoY basis. The revenue deceleration, though concerning, is a bit better than some other D2C businesses that is actually seeing a revenue decline, and so we view this slow growth as a net positive given the economic environment. However, net income has gotten worse on a year-over-year basis, as the company posted -$29.4 million in net loss compared to -$7.6 million in the previous year. We view this bottom line deterioration as highly concerning, and we believe such decline with no plans for a profitability turnaround to be highly concerning.
International Growth Potential
With decelerating growth in the U.S. markets, Allbirds is setting its sight on international markets for next lever of growth. In 2021, the company reported $68 million in net revenue from the international markets, and the company has seen 80% CAGR in revenue growth in a 3-year time frame. With presence in 35 major markets across the world, including China, Japan, Korea, and U.K., Allbirds plans to expand its brand awareness and find additional revenue streams outside the U.S. As such, the company plans to open more locations while continuing to rely on digital sales to expand the business.
However, the apparel market is highly competitive and we believe that the company will struggle to get its brand to effectively compete in international markets. Even in America, the company's brand awareness only stands at 11% , despite the heavy marketing efforts and a fairly large brand following due to the company's focus on sustainability. We believe that international markets will be even more competitive, and the company's losses will make it difficult for Allbirds products to effectively compete internationally.
Liquidity Risks
As a result of continued losses from operations, Allbirds is seeing its cash pile decline rapidly after raising funds from the IPO. From the last two reported quarters, the cash balance has declined from $288.6 million in Q4 2021 to $207.3 million in Q2 2022. That's a cash balance decline of more than 25% in the span of 6 months. Assuming that rate of decline with no additional levers to raise capital, Allbirds will only have less than 6 quarters until the cash reserves are wiped out. This should be highly concerning to investors. Allbirds has guided that in 2022, the company will have an adjusted EBITDA range of -$37.5 million to -$42.5 million and there's no clue as to when the company will start seeing a profitable bottom line. The CFO left the following vague answer on profitability :
We are confident that these investments in the customer, coupled with our Simplification Initiatives, will help us navigate this consumer slowdown and position us for accelerated profitable growth when the headwinds pass.
- Mike Bufano, Chief Financial Officer
Thoughts on Valuation
The company is hard to value due to its lack of profitability, short history of financial performance, and lack of comparable peers. On a couple of multiple metrics, the company is trading cheaply at around ~1.56x P/S multiple. On a Price to Book value, the company trades at around ~1.35x P/B multiple. For a normal consumer discretionary business, these multiples are on the lower end, and would be a good sign of the company's value. However, in this scenario, we don't view the multiples as a meaningful indicator of the company's value as we believe impending liquidity risks and continued net losses from operations poses an immense risk to the downside.
Final Takeaway
We are recommending a "SELL" on Allbirds due to the company's subpar financial performance, poor international market position, and the major liquidity risks facing the company. With increased economic risk and slowdown in consumption, we believe that there is no immediate catalyst for Allbirds' financial prospects to improve and for the market to meaningfully re-rate the stock's valuation.
For further details see:
Allbirds: Losing Its Wings