S&P Global Ratings raised its debt ratings on Birkenstock as the German-based footwear brand’s sales growth of close to 29 percent and S&P Global Ratings-adjusted EBITDA margin of 29 percent in fiscal 2022 outperformed the rating agency’s expectations.

S&P said the performance led to an S&P Global Ratings-adjusted debt to EBITDA of about 5.7x, compared with the 6.5x forecast. The above-market growth is supported by its strong brand, loyal and diversified customer base, and good execution in direct-to-customer penetration, according to S&P.

S&P expects Birkenstock to further reduce S&P Global Ratings-adjusted debt to EBITDA to below 5x in 2023 and maintain it below this level over the forecast period. S&P said, “This is considering the company’s solid half-year 2023 operating performance and continued prudent approach in financial policy.”

At the same time, S&P estimates the company will be able to generate annual reported FOCF (free operating cash flow) of €140 million to €170 million this year and €270 million to €300 million in 2024, driven by normalized capital expenditure (capex) following the completion of new production facilities.

As a result, S&P raised its long-term issuer credit rating on Birkenstock Financing to ‘B+’ from ‘B’. At the same time, it raised its issue rating on the company’s €1.13 billion (euro equivalent) senior secured term loan due 2028 to ‘B+’, in line with the issuer credit rating on the company, and on the €428.5 million senior unsecured notes due 2029 to ‘B-‘ from ‘CCC+’. Birkenstock’s recovery ratings remain unchanged at ‘3’ (recovery prospects: 60 percent) for the senior secured debt and at ‘6’ for the unsecured notes.

The stable outlook reflects S&P’s expectation that Birkenstock’s stated objective to maintain a conservative financial policy and strong operating results will result in S&P Global Ratings-adjusted debt to EBITDA below 5.0x on a sustainable basis.

S&P said in its analysis, “Birkenstock’s above-market operating performance set the company on a solid growth trajectory, leading to an S&P Global Ratings-adjusted debt to EBITDA below 5.0x over the coming two years.For fiscal 2022 (year ended Sept. 30), the company delivered a reported revenue growth of 28.6 percent and S&P Global Ratings-adjusted EBITDA margin of 29.8 percent, translating into an S&P Global Ratings-adjusted debt to EBITDA of 5.7x and S&P Global Ratings-calculated free operating cash flow (FOCF) of about €80 million. Stronger-than-expected operating performance in fiscal 2022 largely followed the harmonization efforts on average-selling prices and product range diversification into closed-toe shoes categories (representing about 30 percent of total sales now). In addition, and as a part of its distribution strategy, the company ended some less-profitable wholesalers’ partnerships to focus on the more-profitable direct-to-customer (DTC) channel, now representing almost 38 percent of sales (from 20 percent in 2019). Despite adverse economic conditions, Birkenstock offset inflation’s impact on its cost base—driven by higher cork, leather, energy, and labor costs—thanks to timely price pass-throughs supported by strong brand pricing power and better channel and product mix. The momentum continued in first-half 2023, where the company reported revenue growth of 19 percent to close to €650 million sales, and an EBITDA adjusted margin of 35 percent (adjusted for unrealized foreign exchange losses) supported by all regions and distribution channels. We, therefore, expect Birkenstock to continue deleveraging this year, thanks to strengthening EBITDA of €450 million-€460 million (or 31.0 percent-32.0 percent S&P Global Ratings-adjusted EBITDA margin) by year-end 2023, resulting in S&P Global Ratings-adjusted leverage of 4.3x-4.8x this year and 3.8x-4.3x in 2024.

“Birkenstock made voluntary debt prepayments of $50 million under its €750 million-equivalent, U.S.-dollar-denominated term loan B (TLB), demonstrating its commitment to reinforce its balance sheet and maintain prudent capital allocation. The funds for the early debt repayment came from internal cash generation, underpinning the company’s strong operating performance. In our view, the recent debt repayment, combined with the lack of shareholder remuneration, testify to Birkenstock’s stated objective to deleverage, also supported by its main shareholders (private equity fund L Catterton). We understand the company will continue to implement prudent discretionary spending while maintaining an S&P Global Ratings-adjusted debt to EBITDA comfortably below 5.0x, significantly below the post-LBO level of above 7.0x. Our adjusted debt calculation includes €1.2 billion of TLB (divided into euro and dollar tranches), €428.5 million of senior unsecured notes, and a €295 million shareholder loan related to the deferred purchase price under the acquisition agreement, including accrued payment-in-kind interest. Moreover, we adjusted the company’s reported debt to include about €140 million of lease liabilities, and in line with our methodology, we do not net the debt with cash and cash equivalents due to the financial sponsor ownership. Moreover, we believe Birkenstock will preserve ample liquidity headroom thanks to available credit facilities and anticipated positive and recurring cash flow. On March 31, 2023, Birkenstock had about €172 million of cash on hand and a fully available €200 million asset-backed-loan (ABL) facility. In our base-case scenario, we anticipate Birkenstock has sufficient liquidity available to fund its day-to-day operating needs and financial commitments and meet its covenant tests.

“The company’s DTC strategy enables it to consolidate its position in mature markets and expand into new regions and product models. In the past few years, Birkenstock has more than doubled its S&P Global Ratings-adjusted EBITDA base, to an expected €450 million-€460 million in 2023 from about €189 million in 2021, proving the company’s capacity to expand its market share while tightly managing its cost base. We believe that the resilience of its margins amid unfavorable market conditions supports business predictability and credit metric stability. The company has also gained control over its brand image, pricing, and distribution by increasing the share of its DTC operations, today representing 38 percent of its sales with a target to reach 50 percent. We also see Birkenstock relying less on its core models (such as Arizona and Boston) and on spring and summer collections following the introduction of closed-toe shoes in its product range. We view positively this product range diversification and believe it allows Birkenstock to reduce its business seasonality in spring and summer (today accounting for 60 percent of its sales) and better manage its intra-year working capital movements. The company is also finalizing the construction of a new production facility, expected to be fully operational by year-end 2023, adding up to 10 million pairs of shoes annually to Birkenstock’s production capacity. This strategic investment will allow the company to face unmet demand in unpenetrated regions including Japan, China, and Southeast Asia, and enter growing product categories such as outdoor, after-sport shoes for athletes, and kids’ collections.

“The stable outlook reflects our expectation that Birkenstock’s stated objective to maintain a conservative financial policy and strong operating performance will result in S&P Global Ratings-adjusted debt to EBITDA below 5.0x sustainably. This reflects a continued business expansion, underpinned by Birkenstock’s above-industry-average growth prospects resulting in an expected S&P Global Ratings-adjusted EBITDA margin of 31 percent-32 percent over the next couple of years.”

Photo courtesy Birkenstock