2023-10-12 13:39:57 ET
Summary
- Birkenstock Holding Limited shares fell 12% on their public debut, still resulting in high valuations that apparently are unappealing to many investors.
- The company has seen impressive growth under CEO Oliver Reichert, with revenues quadrupling from 2014 to 2022.
- Birkenstock is a niche player in the global footwear industry, with ample growth opportunities as consumers seek healthier and better products.
Shares of Birkenstock Holding Limited ( BIRK ) have seen a dramatic public debut, as shares fell 12% to $40 and change. Even after this dramatic decline on the first day of trading, the resulting valuations remain too demanding to see appeal, as valuations remain nosebleed high, too high to get involved here.
German Quality
Birkenstock is a global brand with a strong heritage which goes back to 1774, known for quality and functionality, which is inspired by the belief that humans are intended to walk barefoot on a natural yielding ground.
Based on this belief, Birkenstock has developed a broad range of foot-based products which include traditional models, as well as new styles, with German quality being guaranteed by the fact that 95% of all products are assembled within Germany.
Long having been a family-led business, the family Birkenstock invited outside management which includes long serving CEO Oliver Reichert to unleash the potential of the business. Since the start of his tenure in 2013 as CEO, Birkenstock has seen impressive growth as revenues have quadrupled from about EUR 300 million in 2014 to over EUR 1.2b billion in 2022.
This still makes it a relatively small and niche player in a huge EUR 340 billion global footwear industry, leaving ample growth opportunities. This comes as consumers opt for healthier and better products, the emergence of casualization of clothing at other occasions, and appreciation for craftsmanship and heritage.
As of now, Birkenstock derived just over half of sales from North America, complemented by the home markets in Western Europe, and Asia-Pacific to a minor extent. Most customers are actually female, with customer groups diversified nicely between age and income cohorts. Moreover, the direct-to-consumer business has approached 40% of sales in 2022, seeing massive increased penetration, certainly since the start of the pandemic.
Valuation & IPO Thoughts
Birkenstock sold a total of 32.3 million shares at $46 per share, with the IPO being priced within the preliminary offering range between $44 and $49 per share. Some 10.8 million shares were sold by the company, with the remainder of the shares sold by selling shareholders, as the business stands to receive gross proceeds of $497 million in connection to the IPO (ahead of any green shoe option).
These proceeds are used to reduce net debt, with pro forma net debt seen around EUR 1.1 billion. With nearly 188 million shares outstanding at $46 per share, the equity valuation of the stock comes in at $8.6 billion, equal to EUR 8.1 billion, granting the business an enterprise valuation of around EUR 9.2 billion.
The business generated EUR 962 million in revenues in the year ending September 2021 on which it posted operating profits of EUR 230 million. Revenues rose 29% to EUR 1.24 billion in the year ending September 2022, with operating profits rising to EUR 363 million.
For the first nine months of the year 2023, revenues were up nearly 22% to EUR 1.12 billion, putting the company firmly on track to post EUR 1.5 billion in sales this year. Operating income of EUR 235 million was down compared to a near EUR 278 million number in the same period in 2022, with a delta of EUR 83 million due to the swing in foreign exchange losses.
With shares down to $40 on the first day of trading, the market value has come down by over $1.1 billion and just over a billion Euros. This reduces the enterprise valuation to about EUR 8.1 billion, to thereby value operations at around 5.4 times sales.
With operating profits trending at EUR 380 million a year, if we adjust for the foreign exchange losses, we can construct the profit potential. Assuming a 5% cost of debt on EUR 1.1 billion in net debt and a 30% tax rate, I peg net earnings potential at around EUR 225 million. This works down to earnings potential to just about EUR 1.20 per share, as this high valuation at nearly 40 times earnings was likely the reason for the big decline in the share price on the first day of trading, after which shares still command an earnings multiple in the mid-thirties.
Final Words And Concluding Remarks
The truth is that this disappointment was seen coming, as Birkenstock commanded a very demanding valuation at the IPO price. This is a statement that remains valid today even as shares have fallen by double-digit percentages on the first day of trading.
The biggest risk in my view is that of the valuation, as other risks in the offering include the fact that the company has some debt outstanding, although it appears manageable. Other risks include that of a controlled ownership position of MidCo, stiff competition as the company posts steep higher operating margins in the mid-twenties, supply chain issues, fashion trends, alike.
Regarding the valuation, we can look at some competitors which are listed. These, among others, include Crocs, Inc. ( CROX ) as the brand which comes perhaps closest to the specific lineup of footwear. Shares of Crocs have actually seen some tougher times as of recent, and trading at $86 the company commands a $5.3 billion market capitalization, which excludes a $1.9 billion net debt load, granting that business a $7.2 billion enterprise valuation here.
This values Crocs at less than 2 times sales which are seen up by double-digit percentages to just over $4 billion this year. With margins of Crocs similar to Birkenstock, it is hard to explain this massive sales multiple dispersion. Given the absolute multiples, I am still very careful on Birkenstock Holding Limited stock here, even after the dismal results on the opening day of trading and the impressive long-term and steady revenue growth trajectory.
For further details see:
Birkenstock Stock: Sandals On Sale