Wall Street brokerages largely initiated Birkenstock Holding with their top ratings, pointing to a likely boost from the German sandal maker’s loyalty with consumers, expansion into untapped categories, channels and geographies, and recent investments to increase capacity.
Birkenstock had a rough entry into public markets with its IPO offering priced at $46 per share, slightly below the midpoint of its projected range between $44 and $49.
On its first day of trading on October 11, BIRK shares fell 12.6 percent to close at $40.20 and sunk to as low as $35.83 in the days afterward. Along with subpar IPO debuts from chip designer Arm Holdings, grocery delivery app Instacart, and marketing automation firm Klaviyo, Birkenstock’s lackluster reception doused hopes for a U.S. IPO market resurgence.
Birkenstock continues to trade below its IPO price although the stock was able to gain 33 cents, or about 1 percent, on Monday to close at $41.49 as many of the firm’s 22 underwriters started coverage with mostly favorable ratings following the expiration of the mandated quiet period.
The offering was led by Goldman Sachs, JPMorgan Chase & Co. and Morgan Stanley.
Goldman Sachs initiated Birkenstock with “Buy” rating at a price target of $48.50.
In a research note, analyst Louise Singlehurst identified three growth drivers at Birkenstock that may drive “upside risk” to Goldman’s “conservative” forecast for 18 percent sales CAGR (compound annual growth rate) from 2023 through 2026.
First, Goldman sees an opportunity for geographic expansion and market share gains within the $350 billion the global footwear industry. Singlehurst said, “Whilst it is a competitive market, it is highly fragmented, with Birkenstock’s estimate of its market penetration at less than 1 percent. The strength of the brand is the success of the iconic footbed which underpins the product offer and drives strong customer loyalty.”
While the Americas is Birkenstock’s largest market, Goldman forecasts 16 percent CAGR growth through 2026 through wholesale space expansion and increasing sales densities within existing doors. Newness within the core silhouettes and under-penetrated categories, including professional and children’s, were cited as growth drivers. Goldman also believes Birkenstock still has “plenty of scope for growth,” with Birkenstock’s FY23 sales in the Americas region expected to reach $840 million versus Crocs’ sales in the Americas of $1.6 billion in 2022.
Singlehurst also said the opening of a new factory in Germany should enable Birkenstock to “increase volumes materially” with supply chain constraints and subpar production capacity limiting growth in FY22. Singlehurst said, “Birkenstock is rare amongst the lifestyle peers, particularly within footwear, given it fully integrates the manufacturing and control of production, which is a key area of differentiation, in our view.”
Finally, the analyst expects Birkenstock will benefit from its broad pricing architecture that includes core openings such as the Arizona, at €110, and Big Buckle, €140, but also ranging from entry price points for EVA styles, €40, to over €1,600 for the highest-end collaborations. Singlehurst wrote, “Whilst expansion of the EVA product line is dilutive to the price mix, we think it can be supportive to margins and also customer acquisition as well as repeat purchases. We also expect the expansion of the closed-toe offer (the Boston being the most well-known) should help balance the seasonality of the business as well as support growth in ASP.”
Telsey Advisory Group initiated coverage of Birkenstock with an “Outperform” rating at a $47 price target.
“Birkenstock is a heritage footwear brand rooted in function, quality, and tradition maintaining strong topline trends and an industry-leading margin profile while expanding its portfolio and reach,” wrote Dana Telsey in a note.
The analyst said Birkenstock has “strong brand foundations with a loyal customer base” as the average Birkenstock customer in the U.S. owns 3.6 pairs and 86 percent of recent Birkenstock purchasers have a desire to purchase again. She believes the Birkenstock footbed “is not easily replicated” and remains a competitive advantage.
Growth drivers cited by Telsey include DTC through “selective store openings” and e-commerce gains. DTC has expanded to 38 percent of total revenue in FY22, up from 18 percent in FY18. She said Birkenstock plans to deliver 23 percent CAGR growth from its DTC operations from FY23 to FY26, “driven by outsized growth from the APMA market, along with steady expansion across the Americas and Europe as well.”
From a product perspective, Telsey sees additional opportunities for Birkenstock to expand into footwear categories such as orthopedics and professional, outdoor and active, kids, home, and sneakers. She noted that Birkenstock is gaining traction with closed-toe silhouettes which typically generate a higher average selling price and can be worn year-round. She said, “The Birkenstock footbed is the base of all production expansion and serves as a kind of “blank canvas” as the company grows its assortment.”
J.P. Morgan initiated its coverage of Birkenstock with an “Overweight” rating at a $48 price target.
Matt Boss expects Birkenstock to benefit from its “strong tenured” management team that has driven 20 percent revenue CAGR since FY14. Boss wrote, “Birkenstock today is led by a strong leadership team w/ CEO O. Reichert at the helm beginning in 2013, who led a rationalization of third-party distributor models across regions to regain control of the brand’s distribution & unlock the brand’s long-term growth potential (=20 percent revenue CAGR since FY14) with forward ‘under-promise/over-deliver’ mentality pointing to conservatism to our 17 percent top/bottom-line model algorithm.”
Boss also noted that the brand’s profitable growth marked by a “30 percent EBITDA margin profile” has been guided by an “engineered distribution” strategy of “carefully allocating every single unit produced across channels to maximize EBITDA dollars/pair and support long-term, consistent growth.” Birkenstock keeps current demand “at least 20 percent higher” versus internal revenue plan, he noted.
The analyst further believes Birkenstock is in the “early innings” of growth across regions, channels and categories. Boss wrote, “Importantly, our top-line build of +mid-to-high-teens growth(+) stands ‘prudently’ below BIRK’s trailing +26.5 percent trailing 3-year average revenue profile (& 20 percent trailing 8-year average) with +18 percent ‘core’ silhouette growth at 75 percent of sales (Arizona, Boston, Gizeh, Mayari, and Madrid) over the past 4 years pointing to category, DTC, and/or geographic expansion translating to potential incremental revenue upside to our estimates.”
Jefferies initiated coverage of Birkenstock with a “Buy” rating at a $50 price target.
“BIRK has undergone a significant transformation since the appointment of CEO Oliver Reichert, shifting from a family-owned, production-oriented business to a global footwear brand with a broad portfolio, underpinned by its core silhouettes (~75 percent of F’22 revenue),” wrote Randy Konik. “Given its historic brand and loyal customer base, we believe the company is well-positioned to drive strong top-line growth, maintain its attractive margin profile, and expand its addressable market.”
He believes that with core silhouettes making up about 75 percent of revenues, Birkenstock has “ample whitespace across a number of underpenetrated categories.” He noted that closed-toe offerings have grown to about 20 percent of FY22 sales from 11 percent in FY18.
He also said while Jefferies sees wholesale growth expanding at a 12 percent CAGR from FY23 to FY26, faster DTC growth (23 percent projected CAGR from FY23 to FY26) provides an “attractive margin expansion opportunity.”
Konik noted that Birkenstock’s recent investments of over €150 million in new and existing facilities and the acquisition of a component manufacturing facility in Portugal will negatively impact margin performance in the near term but offer long-term benefits.
BMO Capital Markets initiated coverage of Birkenstock with an “Outperform” rating at a $50 price target.
“We believe Birkenstock represents a brand with significant top-line whitespace ahead, via 1) Core growth, 2) Product extension and 3) Geographic expansion, all supported by expanded capacity,” said analyst Simeon Siegel.
He noted that Birkenstock management has predicted growth in the mid- to high-teens. The gains are expected to be driven by double-digit increases in units led by expanded production capacity, DTC expansion and tapping underpenetrated product and geographies. Average selling prices are expected to increase in the mid-single digits range.
Siegel noted that Birkenstock’s gross margins above 60 percent have been helped by higher ASPs (average selling prices)/retail price increases, engineered distribution, higher DTC penetration and production efficiencies. The brand also has a “proven track record of consistently growing” ASPs but also benefited from channel shifts, including increased DTC distribution.
Siegel also called out management’s strategy of “balanced scarcity” and ”engineered distribution” that not only helps drive full-price sell-through but also enables “strong control over brand equity.”
BofA Securities initiated coverage with a “Neutral” rating at a $44 price target. BofA Global Research analyst Lorraine Hutchinson wrote in a note, “While we view it as a strong brand with unique attributes, we think outsized growth on top of the robust recent trends will be difficult.”
Morgan Stanley’s Edouard Aubin assigned a price target of $41 and an “equal-weight” rating, saying most catalysts were already priced in.
HSBC Global Research started coverage of Birkenstock with a “Hold” rating at a $42 price target, believing recent production investments to weigh on gross margin. however, HSBC’s analyst Erwan Rambourg still cited the potential for growth outside the U.S. and Europe. He wrote in a note, “It appears that BIRK’s awareness is very low outside of four key countries: Germany, the US, the UK and France,” read the note. “And this means that, on paper, the brand could become much bigger in years ahead if it manages to build on that awareness more broadly.”
Among other firms, Baird started coverage on Birkenstock with “Outperform” Rating, $48 price target; Deutsche Bank, “Hold” rating, $43 price target; BNP Paribas Exane, “Neutral” rating, $44 price target; Citigroup, “Buy” rating, $52 price target; Williams Trading, “Buy” rating, $55 price target; Stifel, “Buy” rating, $47 price target, Piper Sandler, “Overweight” rating, $50 price target; and Bernstein, “Market-Perform” rating, $37.15 price target.
Photo courtesy Birkenstock
