S&P Global Ratings said the debt ratings of Birkenstock on the footwear maker offered improving results in the six months ended March 31 and its refinanced loan agreements.

The rating agency noted that in the first half of 2024, Birkenstock continued to post strong operating performance with 22 percent year-on-year sales growth driven by demand across all channels, product categories and regions, revising up its full-year guidance to expected annual sales growth of 20 percent in 2024, from 17 percent to 18 percent previously.

S&P Global Ratings now expects Birkenstock’s adjusted EBITDA to range from €535 million to €545 million versus €520 million to €530 million. S&P said, “Birkenstock has a good track record of profitable growth and the ability to diversify its product mix by growing in closed-toe shoes. In our view, these translate into a stronger business risk profile of the company.”

S&P also noted that in May 2024, Birkenstock signed a new agreement consisting of new term loans (€375 million and $280 million due in 2029) and a revolving credit facility (RCF) of €225 million due 2029, used to refinance its existing term loans, outstanding €375 million and $330 million due in 2028, and to replace the undrawn €200 million asset-backed loan (ABL) facility, reducing the outstanding amount of term loans by approximately US$50 million, reflecting the company’s commitment to accelerate its deleveraging trend with S&P’s expectation of adjusted debt to EBITDA close to 2.8x at year-end 2024 and approaching 2.5x the following year.

S&P raised its long-term issuer credit rating on Birkenstock to ‘BB’ from ‘BB-‘, assigned a ‘BB+’ rating to the group’s new €375 million and $280 million term loans due 2029 with a ‘2’ recovery rating, and raised its issue rating on the existing €428.5 million senior unsecured notes due 2029 to ‘B+’ from ‘B’ with an unchanged recovery rating of ‘6’.

S&P said its positive outlook mainly reflects the possibility of an upgrade if Birkenstock accelerates deleveraging with S&P’s adjusted debt to EBITDA approaching 2x and funds from operations (FFO) to debt sustainably at 30 percent to 45 percent with a commitment to maintain these credit metrics level.

In its analysis, S&P wrote, “Birkenstock’s track record of being able to significantly outperform its addressable market, proven robust brand equity power, successful expansion into the DTC channel, and enlargement of its product range have resulted in stronger business positioning. Over the last three years, Birkenstock has doubled its size with roughly 20 percent compound annual revenue growth (CAGR), substantially higher than the global footwear industry average of 4 percent to 6 percent over the same period.

Birkenstock’s revenue base grew to €1.5 billion in fiscal 2023, ended September 30, 2023, from €722 million in fiscal 2019, supported by volume growth (across all product categories, channels and segments)and average selling price (ASP) which increased by 14 percent year-on-year in fiscal 2023, driven by a mix of factors, including pure price increases, better product mix and higher penetration in the DTC channel.

The group has recently increased its product offering to reduce sales seasonality, improving product diversification and overall group profitability. The non-sandal products (i.e., closed-toe shoes) now represent about 25 percent of total sales versus 14 percent to 19 percent in second-quarter 2023 and slightly more than 50 percent of the group’s DTC sales, with six of the ten top-selling products being non-sandal products. At the same time, the group has increased the overall contribution of its DTC channel, now representing about 40 percent of annual sales, up from 20 percent in 2019. In this way, the group has increased its diversification by channel and reinforced control of its brands and pricing strategy.

“As of March 2024, Birkenstock operates 57 stores and plans to expand its presence to 100 stores in the next three years while keeping equilibrium with its exposure to the profitable wholesale channel.

Retail expansion is backed by a testing phase with the opening of several pop-up stores in Paris, Amsterdam, Barcelona, Milan, and Miami. Store openings in secondary streets are possible because Birkenstock does not need to open in premium locations, given it is a “destination” brand, thus reducing operating costs linked to premium locations.

Although the focus was the development of the DTC footprint in recent years, the company positively views the group’s strategic presence in the wholesale channel (60 percent of revenue as of 2023).

Birkenstock’s B2B operations provide good visibility on current market dynamics due to strong order bookings while keeping profitability levels behind favorable pass-through mechanisms and brand elevation strategy.

“Birkenstock’s brand equity, good strategy execution, and relatively limited marketing spending will continue to support EBITDA margin at about 30 percent. We anticipate the group will sustain a stable EBITDA margin of about 29 percent-30 percent over our forecast period on the back of strong consumer demand and supported by new production capacity and category expansion, including new variations of closed-toe shoes, orthopedics, professional, and children’s offerings.

“For fiscal 2024, we expect a contraction of about 50 to 100 basis points on the S&P Global Ratings-adjusted EBITDA margin, driven by temporary underabsorption of costs due to the ramp-up of some production facilities and higher administrative and staff costs.

“Despite the growing presence in the DTC segment and associated marketing expenses, we believe the group will be able to keep stable marketing spending as a percentage of sales, given that 90 percent of Birkenstock buyers come from unpaid marketing/advertisement channels and over 60 percent of consumers learn about the brand through word-of-mouth, proving the strength of the brand.

“We also believe the move toward premium and closed-toe silhouettes will be the main driver of ASP growth, while we forecast positive volume growth across all product categories, channels, and segments.

“We believe the group will be able to continue to self-fund its expansion strategy, thanks to FOCF of €230 million to €260 million after lease payments in the next 12 months.

“DTC expansion has been internally funded by the group’s good cash flow conversion, with FOCF after leases standing at €111 million in 2023. This growth has been possible thanks to improved operating performance, good working capital management, and reduced interest payments. We expect this positive trend to continue also during our forecast period.

“Thanks to the ongoing expansion and the ongoing penetration into new markets, especially in Asia-Pacific, the Middle East and Africa (a quickly growing region for the group, accounting for about 11 percent of sales with approximately 40 percent annualized growth in the first half of 2024), we expect higher annual capital spending (capex) requirements of around €120 million to €150 million over the next two years versus about €70 million to €100 million in the past couple of years.

“Also, working capital requirements have seen a peak in recent years to support capacity expansion, the entry into new markets, and the group’s transition toward a higher share of DTC, which requires higher inventories. Despite the increase in working capital requirements, we positively view Birkenstock’s management of its inventory stock, which resulted in an improved inventory-to-revenue ratio of 40 percent in fiscal 2023 versus 43 percent the year before. In turn, we project FOCF after leases to increase to €230 million to €260 million in 2024 and €360 million to €390 million by 2025, which provides ample headroom for the group to support the next level of its expansion. Under our base-case scenario, we assume annual lease payments of €32 million to €37 million.

“Birkenstock recently announced it would refinance its existing euro and dollar term loans and voluntarily repay $50 million, which reinforces our perception of its commitment to continue deleveraging.

“In May 2024, the group signed new term loans of €375 million and $280 million due in 2029, and a new €225 million RCF agreement due in 2028 that will be used to refinance the existing €375 million and $330 million term loans due 2028 and to replace the undrawn €200 million ABL facility with the new RCF. In connection with this refinancing, the group is reducing the outstanding amount of term loans by approximately $50 million and increasing the annual amortization to 5 percent for its U.S. dollar term loan. This reflects the group’s commitment to further reduce its debt quantum and to accelerate its deleveraging trend. Under our base case, we expect S&P Global Ratings-adjusted debt to EBITDA, slightly below 3.0x at year-end 2024 and approaching 2.5x the following year.

“The positive outlook mainly reflects the possibility of an upgrade if Birkenstock is able to accelerate its deleveraging with an S&P Global Ratings-adjusted debt to EBITDA approaching 2x and FFO to debt sustainably at 30 percent-45 percent and a commitment to maintain these credit metrics in the future. Under this scenario, we would expect the group to continue to generate sustainable, profitable growth, ultimately translating into higher-than-currently anticipated annual FOCF after leases with discretionary spending prioritizing debt reduction and internal investments. Another scenario for an upgrade could result if L Catteron’s ownership is reduced below 40 percent, together with the group’s commitment to maintain a conservative financial policy with an S&P Global Ratings-adjusted below 3.0x,” concluded the rating’s agency.

Image courtesy Birkenstock