Birkenstock Holding PLC - Walking into the future.
All,
Please find our new analysis here.
Several clients have asked us about Birkenstock. With a YTW of 4.6%, this is not a name in our universe, and we do not expect it to come our way. The equity market values Birkenstock as a luxury brand, but we are not sure its average selling price justifies that lofty multiple. The bonds are trading near the next call price, and we can see a refinance that would take 100 bp off the coupon.
Investment Considerations:
- With a YTW of 4.6%, the Birkenstock SUNs do not offer enough yield to grab our attention. For now, we will stay on the sidelines.
- Birkenstock manufactures in Germany, but around half of its sales are in the Americas. If the US imposes significant trade tariffs, sales would be hurt, and the SUNs would widen to more interesting levels. We will revisit once we know what levels of tariffs the US is proposing, and whether there will be specific tariffs targeting or exempting Birkenstock.
- We would expect tariffs to add €6 to the price of a €60 sandal, and we would expect the demand elasticity to be low for a price move like that.
- Gross margins will be weighed by costs related to new manufacturing and retail capacity over the next year or so, but the impact will be small.
- The equity cushion beneath the bonds is >€10bn, even with significant tariffs, the SUNs are secure.
- Given the cash flow generation and the low leverage, we expect LVMH to look to replace some of the equity with debt over time. The company is investing in upgrading its manufacturing capacity, so we do not expect any imminent action.
Strong Cash Flow and strategic moves to capture more of the margin:
- FYE24 saw OCF of €430m, we expect this to increase to €460m by FYE26. The increase will be held back by the impact of tariffs on Volume growth and gross margins. Increasing inventory investment will postpone the impact of tariffs, but eventually, they will flow through to consumers.
- Margins in FYE 25 will be held back due to under-absorption of costs related to the increase in manufacturing capacity.
- Higher tariffs on imports to the US will hurt volumes, but not immediately. Inventory levels and receivables will rise initially as Birkenstock and its customers look to push the impact out as far as possible
- Birkenstock is investing in its stores, and the direct-to-customer platform to capture more of the margin conceded to wholesalers. The initial impact will drag on free cash flow through elevated capex, but benefits will flow into gross margins from FYE27 as converting wholesale sales to direct sales increases gross margin. Birkenstock will have to support its stores with higher SG&A expenses (including marketing), but we expect margins to rise.
Birkenstock is a high-end brand, but the equity is overvalued:
- A multiple of >20 EBITDA is excessive for Birkenstock. The ASP of c€60 for a pair of shoes may not be cheap, but it is well within the reach of middle-class purchasers. The equity market may drop its multiple, but we see 10x – 15x as a fair multiple, which would still leave a significant equity cushion.
- In our model, leverage falls below 1.0x by FYE 2027, but we expect the majority owners (LVMH) to look to replace some of the equity with debt.
Aengus
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