Last week the market was less than impressed with the first set of numbers released by Birkenstock after its IPO.
Heavy selling drove shares down to around the $44 mark. While revenues were reported up 16% year over year, financial year adjusted EBITDA was singled out as an area of concern.
Investment bank Jefferies however reiterated its ‘Buy’ rating on the stock after the results. It also raised its price target to $52. So is the market undervaluing this iconic footwear brand?
Birkenstock is not just a sandal brand
At first, Birkenstock was primarily known as a sandal brand. However, experts speaking to independent research house Third Bridge said that Birkenstock’s strategy to evolve from a seasonal, summer-focused brand to a 365-day brand has proven successful and attracted new consumers.
In the past year, Birkenstock expanded their product range to include a greater variety of shoes, including boots and hiking shoes tailored for adventures and outdoor activities.
“Wholesale used to be the dominant distribution channel,” said Alex Smith, Global Sector Lead at Third Bridge. “However, our experts note a shift towards becoming a direct-to-consumer brand, with a strong emphasis on e-commerce and social media. This shift is expected to positively impact the brand perception.”
This could explain why celebrities share their Birkenstock products in social media even though Birkenstock has never approached any celebrity to market their sandal.
Third Bridge said that its experts identified significant growth potential for Birkenstock in the US and Asia. The reputation of high-quality, German-made shoes holds considerable value in Asian countries, where there is a demand for genuinely well-crafted footwear amidst an influx of cheaper alternatives.
Shares in Birkenstock fell 12% when it initially listed in the US. The brand originally created excitement for investors when management mulled an IPO following massive sales of Birkenstock shoes during the pandemic, and the subsequent more relaxed dress codes in the office.
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Investors worry about market conditions for Birkenstock
Investors have, however, worried about the market conditions Birkenstock is now trading under, especially the tough environment for retail and with many of its big markets flirting with recession. The company told investors that it is ramping up spending to open more stores and expand production. It said it expects sales to rise more than 15% in 2024.
“We are aware that it is not easy to compare Birkenstock to any other listed company,” said CEO Oliver Reichert in an investor call last week. “We are neither luxury nor fashion nor footwear.” Birkenstock is forecasting sales growth of 17-18% in its 2024 financial year.
Reichert is fully on board with a direct consumer strategy aligned with Birkenstock’s purpose-driven brand proposition. It has a pretty loyal consumer base. Just taking the US as an example, buyers of Birkenstock footwear own on average 3.6 pairs of shoes. Some 90% of its customers come through unpaid channels. That’s a great brand proposition in my book.
David Kahan, who oversees the Americas for Birkenstock, talks in terms of ‘land grabs’ as being key to the company’s future success. “Land grab is a term we use where we really aggressively take some share. The more challenged the consumer spending power has been, really the better it’s been for the brands that are really in high demand,” he said.
Retail companies with desirable brands that fit into the current requirements of consumers can still do well. Analysts tend to split their attention between very large name retail brands, and the luxury specialists. Between these two extremes there exists a clutch of good quality companies which the street is in danger of undervaluing. Birkstentock could well be one of these.
A case in point is London-listed Warpaint London, which The Armchair Trader tipped exactly a year ago, and which was up 122% at the end of December. We also tipped Skechers in October, which is up nearly 30% since then. There is still money to be made in retail, but as with buying shoes, investors need to aim for both quality and value.
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