Stock Spotlight: Birkenstock steps into uncertainty as expectations run high

The 250-year-old German sandal maker publicly listed on 11 October 2023 and on its first day, shares opened 11% below its initial price, according to data from Morningstar Direct.

The company priced its shares at $46 at IPO, the midpoint of the indicated range of $44 and $49, but had slumped to less than $41 at the end of trading. The company had expected to raise roughly $1.5bn from the listing.

“They say timing is everything when it comes to IPOs and we can safely say Birkenstocks timing was off, given the sharp sell-off in October,” said Michael Hewson, chief market analyst at CMC Markets UK.

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Russ Mould, investment director at AJ Bell, argued there are also company-specific issues that have impacted its weak performance, such as a valuation that “does not immediately look cheap”.

“The stock trades on around five times sales for 2023 and even if earnings take off as analysts expect there is no certainty, given that recession worries lurk, despite all of markets’ current faith in a soft landing (at worst),” he said. 

“A multiple of 25 times 2025 earnings hardly leaps off the page as a bargain, even allowing for the power of the brand and the 20%-plus operating margins that the company makes.”

Still, the company’s IPO was the third largest in the US market this year, and it performed better than other listings, such as Instacart and Klaviyo. Moreover, its shares have slightly rebounded since its float, up 5% over the last month, according to data from Morningstar Direct.

Investment case

Beyond the underwhelming response to one of the very few Wall Street listings this year, the shoe maker remains profitable, with total 2022 revenue of $1.35bn and net income of $202.8m. 

When the accounts were released prior to the IPO, the revenues for the nine months to June were estimated to be $1.2bn, surpassing the total revenue from the previous year. 

The money raised by the IPO has also allowed the company to repay $550m in loans, reducing its total debt to €1.31bn. 

Ismail Rashid, equities analyst at Charles Stanley, said Birkenstock’s investment case is supported by a “strong brand heritage” and a vertically integrated business model, which he said gives it “industry leading margins”. 

“It has a long runway of growth as it looks to target new under-penetrated emerging markets,” he added. 

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AJ Bell’s Mould added the company has a brand with pricing power, which can mean robust margins, good cash flow and a “decent stream” of dividends over time. 

“Pricing power can be particularly valuable at a time of inflation, as it helps the firm defend those margins and that cashflow, thanks to customer loyalty,” he said. 

Hargreaves Lansdown head of money and markets Susannah Streeter said that although the brand’s popularity could provide some resilience, there is caution among investors surrounding Birkenstock’s future profit growth, given cost pressures. 

“With cost-of-living pressures still swirling, and the Federal Reserve still appearing intent on keeping interest rates at ‘restrictive’ levels to lower inflation further, there will also be concern that consumers might have less money to spend,” she said. 

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Streeter noted that given retail sales are slowing in the US in light of the Fed’s rate hikes, potential interest rate cuts should help give more support to consumer discretionary stocks. 

AJ Bell’s Mould noted the company has also made several strategic moves designed to boost growth, notably investment in its online offering, taking back distribution from third parties and expansion of its retail estate.

Charles Stanley’s Rashid said Birkenstock’s rapid expansion opens the company up to execution risks. Moreover, he noted that its premium valuation relative to its peer group raises the pressure for the brand to deliver against this “high expectation”.

“The company has not reported quarterly numbers so we will find out when earnings reports – over time – are compared to earnings expectations,” added Mould.