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Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Birkenstock starts trading today in key test of IPO market
Peter Garnry
Chief Investment Strategist
Summary: Birkenstock starts trading today on NYSE under the Saxo ticker symbol BIRK:xnys with its shares priced yesterday at the midpoint of the pricing range valuing the company at UDS 8.6bn. Birkenstock is expected to deliver revenue growth of 21% in FY23 (ending 30 September 2023) and a strong adjusted EBITDA margin above 35% reflecting the strong brand and premium pricing. Some key risks to consider are the equity valuation, concentrated revenue profile with 75% of revenue coming from just five core products, and then a bit low return on invested capital.
Key points in this equity note:
- Birkenstock IPO was priced yesterday at the midpoint of the price range valuing the company at $8.6bn. The stock starts trading today with the Saxo ticker symbol BIRK:xnys
- Birkenstock has a strong brand and has showed resilient growth during the pandemic with revenue growth expected at 21% in FY23 (ending 30 September 2023)
- Some key risks about the Birkenstock business are a higher than average equity valuation, high revenue concentration in just five core products, and a bit low return on invested capital
A strong brand with attractive growth profile and profitability
Birkenstock is an iconic German-based sandal and shoe company and the next company to IPO this year following recent IPOs from Arm and Instacart. The stock was priced yesterday at $46 per share which was around the midpoint of the pricing range valuing the company at $8.6bn and raising $1.5bn. Birkenstock starts trading today on NYSE under the Saxo ticker symbol BIRK:xnys.
Investor appetite for Birkenstock has been solid and the LVMH Chairman Bernard Arnault’s family holding company has already invested in Birkenstock and has indicated that it is willing to increase its investment in Birkenstock. This is seen by many investors as a good sign for the outlook of the Birkenstock brand as LVMH is the leading luxury conglomerate in the world. The strength of the Birkenstock brand is also evident in the prospectus material. Birkenstock has strong US brand awareness and a high willingness to repurchase with each US customer owning more than three pairs of Birkenstock sandals or shoes.
The company has also successfully expanded its direct-to-consumer business to 38% which has been a key driver of the recent EBITDA margin expansion from 27% in FY20 (ending 30 September 2020) to expected 35.5% in FY23 (ending 30 September 2023). Revenue in FY23 is expected to be around $1.5bn up 21% y/y but revenue growth is likely to decrease further as global consumer spending is normalising post the pandemic.
In addition, the future growth of the company lies outside North America and Europe which today are 90% of revenue. Another underlying positive factor for the outlook is that revenue is almost equally balanced across all age groups suggesting that Birkenstock’s brand appeals to young people and thus future can be relied on. In addition, the customer base is predominantly high income groups and thus the company is able to sell its sandals and shoes at premium prices improving the profitability of the business.
There are also a few negative things to highlight about the business. With around $4bn in deployed capital in the business the return on invested capital could be better at just around 8% for the FY23. However, as the company becomes a publicly listed company this is likely to be a key priority going forward. Birkenstock also has a high product concentration with 75% of revenue coming just five core products. In terms of equity valuation it is set such that Birkenstock is valued at a premium to say Adidas. Birkenstock is valued at a FY24 EV/EBITDA multiple of around 18x compared to Adidas at around 15.3x, but Birkenstock also has a higher growth profile due to low revenue in Asia and more potential for direct-to-consumer penetration.
Post IPO performance of Arm, Klaviyo, and Instacart
Birkenstock is the fourth important IPO this year as the IPO market is coming back as investors are now more willing to invest in IPOs given the outlook this year has changed from certainty of recession to growth being robust. Of the three recent IPOs from Arm, Klaviyo and Instacart two of them have seen gains since the IPO. It is only Instacart that is down since the IPO.
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