Birkenstock garners mostly bullish ratings after IPO but is still languishing below its issue price

By Ciara Linnane

Stock has not yet traded above its IPO issue price of $46

Birkenstock Holding Ltd.'s stock rose Monday as analysts initiated coverage of the iconic German sandal maker with mostly bullish ratings now that the lockup period after its initial public offering has expired.

Of 13 analysts submitting ratings to FactSet, nine have a buy rating or equivalent on the stock, while four have a hold rating. The average stock-price target is $43.78, or 6% above its current price.

But the stock (BIRK) was last quoted at $41.13, below its IPO issue price of $46, which it has not yet attained. The company went public in October and marked one of the worst debuts for a billion-dollar deal of the last decade, according to Renaissance Capital.

For more, read: Birkenstock's stock falls nearly 13% in trading debut, ends well below IPO price

Analysts weighing in on Monday highlighted the company's transformation from a family-owned company to a global footwear brand with a portfolio that's underpinned by its core silhouettes and loyal customers.

"Given its historic brand and loyal customer base, we believe the company is well-positioned to drive strong top-line growth, maintain its attractive margin profile, and expand its addressable market," said Jefferies analysts led by Randal Konik, who assigned the stock a buy rating and $50 price target.

Konik believes the company's vertically integrated multichannel distribution model can help build brand awareness and increase its addressable market.

In its IPO filing documents, the company describes the buildout of its direct-to-consumer channel and how it balances that with a wholesale channel of about 6,000 carefully selected partners in more than 75 countries. Those range from orthopedic specialists to major department stores to high-end fashion boutiques. Birkenstock limits access to certain premium products to a curated group of partners in an effort to create scarcity, according to the prospectus.

For more, read: Birkenstock is going public: 5 things to know about the iconic German sandal maker's IPO designs

Jefferies also welcomed an expected long-term mid- to high-teens revenue-growth rate, gross margins that are expected to come to exceed 60%, and adjusted earnings before interest, taxes, depreciation and amortization margins above 30%.

JPMorgan agreed and noted that the adjusted Ebitda profile is about 10 points above global footwear peers and is supported by the company's more than seven years of double-digit unit growth.

Management's scarcity-creation approach is a positive, the analysts said as they initiated coverage with an overweight rating. Current demand is understood to be at least 20% higher than management's revenue plan, supporting brand health and long-term sustainable growth, they wrote in a note to clients. JPMorgan set a price target of $48.

Stifel also assigned the stock a buy rating with a $47 price target.

"Consumer trends embrace the qualities of Birkenstock's products: comfort and minimalist fashion, quality craftsmanship, natural materials,versatility, and attention to foot health," wrote the analysts led by Jim Duffy.

Stifel is expecting the roughly EUR200 billion ($214.6 billion) nonathletic-footwear market to grow at a more than 4% annual compound annual growth rate through 2027, offering the company the opportunity to almost double its market share from 1% retail value in 2022 to 1.7% in 2027.

William Blair initiated coverage of the stock with an outperform rating and highlighted another advantage the company has over rivals.

"The company's owned production and engineered distribution model create almost real-time flexibility, enabling the company to send product to where it makes the most money while driving high-quality growth," analysts Sharon Zackfia and Tania Anderson wrote.

They also welcomed the opportunity in the company's push into the Asia-Pacific, Middle East and Africa regions, markets neglected in the past as Birkenstock focused on the U.S. and Europe.

Further supporting growth, the company's pipeline addresses new categories and use occasions, including products designed for healthcare, hospitality and utility professionals, expanded collections of active and outdoor, additional children' profiles and exchangeable footbeds.

At BofA Securities, analysts Lorraine Hutchinson and Christopher Nardone struck a more subdued tone, starting coverage with a neutral rating and a $44 price target.

"While we view it as a strong brand with unique attributes, we think outsized growth on top of the robust recent trends will be difficult," they wrote in a note. "This leaves multiple expansion as the key driverof stock performance."

The stock is already trading at a discount to high-growth athletic brands but at a premium over other footwear stocks, they said, adding, "We see this as appropriate."

Deutsche Bank and UBS also rate the stock a hold.

One notable bear had warned investors before the deal that the valuation was too high and that it might be somewhat of a red flag.

David Trainer, chief executive of independent equity-research company New Constructs, pointed out in early October that the company would have a bigger market cap than peers such as Skechers (SKX), Crocs (CROX) and Steve Madden (SHOO).

That would leave Nike (NKE) and Uggs maker Deckers Outdoor (DECK) as the only footwear companies with a bigger market cap. To justify that, Birkenstock would need to generate more than $3.8 billion in annual revenue, or more than three times the $1.24 billion chalked up for all of 2022.

For more, see: Birkenstock's valuation is too high and investors may not make money in its IPO, analyst says

"We don't see this happening anytime soon, if ever," the analyst said.

Birkenstock said last week it would use the proceeds of the IPO for early loan repayment, which has reduced its leverage to 2.5 times.

The company has repaid $450 million of its dollar-denominated Term B loan and EUR100 million of its euro-denominated vendor loan. Both those loans were used to finance the acquisition of a majority stake in the company by L Catterton (LCAA), an investment company formed through the partnership of Catterton, LVMH (FR:MC) and Groupe Arnault.

The stock was up 0.2% Monday and has traded in a range of $35.83 to $42.51 since its IPO.

-Ciara Linnane

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11-07-23 0757ET

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