Birkenstock Holding plc

Moat: 3.5/5

Understandability: 2/5

Balance Sheet Health: 3.5/5

BIRKENSTOCK is a global brand rooted in function, quality, and tradition dating back to 1774. Known for its contoured footbeds and durable designs, BIRKENSTOCK’s product portfolio spans across core footwear, accessories, and licensed products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview BIRKENSTOCK is a global footwear brand rooted in German craftsmanship and orthopedics, providing a unique value proposition: footwear designed for health, comfort, and longevity. The company’s products are primarily sold through a multi-channel distribution strategy which includes both direct-to-consumer sales and wholesale channels, with significant revenues derived from the Americas and Europe.

Revenue Distribution:

  • Americas (AMER): 49% of revenues
  • Europe (EUR): 43% of revenues
  • Asia Pacific, Middle East, and Africa (APMA): 8% of revenues

Industry Trends: The footwear industry is fragmented and competitive, with major players and smaller niche brands vying for market share. Key trends include an emphasis on comfort and wellness, which aligns well with BIRKENSTOCK’s product offerings, the shift towards casual footwear and a growing consumer interest in sustainability and quality, and the increased importance of direct-to-consumer (DTC) sales. There is a major push for brands to be more than functional - they should represent a lifestyle and values.

Competitive Landscape: The footwear market has different segments each with its own competitive dynamics.

  • Athletic footwear is dominated by global players such as Nike and Adidas.
  • Luxury footwear is characterized by high-end fashion brands.
  • Comfort/casual footwear has a broad range of competitors, including both specialized and more generalist retailers.
  • Orthopedic footwear has a more specific niche, which is where Birkenstock primarily competes.

What Makes Birkenstock Unique: While the company’s product can at first seem just another sandal, there are multiple reasons why customers are highly loyal.

  • Proprietary Orthopedic Footbed: A unique, contoured footbed that is designed to be comfortable and supportive for long periods.
  • Heritage and Authenticity: With over 250 years of history, BIRKENSTOCK is a brand with heritage and a reputation for quality.
  • Durable and Sustainable Materials: Made in Germany with an emphasis on quality materials and sustainable production.

Financials In-Depth The information below is based on the company’s financial statements from their report filed on November 7th, 2024 and its 2023 annual report.

Revenues & Sales Growth:

  • Revenue increased by 27% in FY 2023 to €1,481.9 million driven by a 31% increase in units sold, from 2022 to 2023.
  • The company’s direct-to-consumer channel had a 38% share of revenues. DTC revenues continue to grow faster than traditional sales, increasing by 59%.
  • In the 2024 fiscal year ending on September 30, revenues continued growing with total revenue growing 28% year-over-year to 1.24 Billion EUR.

Profitability:

  • Net profit increased by 96.2% to 187.1 million EUR in FY 2023.
  • Adjusted EBITDA margin for 2023 was 26.3%, which is a 350 basis points increase year over year, showing an increasing focus on profitability. For the year ending September 30, 2024 the Adjusted EBITDA margin increased to 34.6% year over year, primarily driven by a strong performance in the Americas.
  • Adjusted net profit also showed substantial growth from 77.5 million EUR in 2022 to 170.6 million EUR for 2023. For the year ending September 30, 2024 adjusted net profit increased by 114% year over year to 276.4 million EUR.

Balance Sheet Health Rating: 3.5/5

  • The debt-to-equity ratio is not explicitly mentioned in the financials, which makes it hard to determine the full health of the balance sheet. However, it is stated that, as of September 30, 2024, total net debt was at 605.5 Million EUR, which is relatively small compared to a market cap of around 10 Billion USD.
  • The company had a cash and cash equivalent position of €344.4 million in 2023, indicating liquidity
  • The company’s free cash flow is very healthy at €386.4 million.

Risks to Moat and Business Resilience: While Birkenstock enjoys a robust market position, it faces several risks:

  1. Intangible asset risks: Brands are valuable, but can lose their luster, and the brand could erode due to negative associations or changing consumer preferences. Therefore, the company must continue to innovate and market effectively.
  2. Technological Disruption: The company is exposed to changing technologies, especially in manufacturing, that could lower barriers to entry to new competitors.
  3. Shift in Consumption: The shift to casual footwear may not be a long term trend, which may hurt the company’s sales. Also, a decrease in popularity of its core orthotic product line can impact the company’s moat.
  4. Competition: It operates in a competitive market. As more and more brands enter the comfort shoe market, it may become more difficult for BIRK to maintain a high valuation.

Recent Concerns/Controversies/Problems:

  • Management Change: In 2023, after many years at Birkenstock, CEO Oliver Reichert handed the role to David Kahan. This could affect the company’s strategic path.
  • Pricing: As of late, many articles are criticizing Birkenstock for their high pricing, that makes their shoes a lot less affordable compared to competitors. The risk is that high prices could make many customers decide to switch to lower priced offerings.
  • Unclear Guidance: BIRK has made the decision to stop quarterly earnings guidance, which provides less predictability for investors.
  • Manufacturing Issues: Management has stated the business has faced challenges with raw materials and manufacturing over the past few years.

Moat Rating: 3.5 / 5 BIRKENSTOCK’s moat is rated 3.5 out of 5. Its primary source of moat strength stems from its intangible assets (its brand and long-standing heritage in orthopedics) and, to a lesser extent, cost advantages related to its control of some high-quality manufacturing facilities. The company has high customer loyalty which creates a moat, but it is still somewhat at risk due to the possibility of competition as the company is not producing an entirely new product. Its network effects are also limited to its supply chain which might limit the company’s long term pricing power.

Understandability: 2/5 While the core product (sandals/shoes) is straightforward, the details of the market, supply chain, manufacturing processes, and financial intricacies can make analysis tricky for a typical investor. The interplay between various business units and geographic markets, also, adds to the complexity of understanding how it creates and extracts value.