Birkenstock Holding: Undervalued, With Tailwinds Ahead

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Birkenstock is expanding into untapped Asian markets and emphasizing sustainability, creating strong growth potential and differentiation from competitors.Financial performance has been robust, with ...

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BalkansCat Investment Thesis In my view, Birkenstock Holding plc (NYSE:BIRK) has a lot of tailwinds ahead as it is expanding its business by capitalizing on untapped markets in Asia and continues its sustainability practices. The company also has performed very well in recent years, with great financial growth across many metrics. Furthermore, based on my own DCF analysis, I find that the stock is undervalued considerably by the market. Therefore, I recommend a buy rating on BIRK. Company Overview Birkenstock is a German-based footwear company that started in 1774 with the goal of promoting wellness through healthy, high-quality, and comfortable footwear. Birkenstock is in a competitive category of sandal/footwear industry with competitors such as Teva, Chaco, Keen, and many more. Birkenstock offers many types of footwear including sandals, clogs, shoes, sneakers, footwear accessories, and etc. Birkenstock also has an international presence, selling to Europe, Australia, New Zealand, Asia, the Middle East, and the Americas. Business Drivers One competitive advantage Birkenstock has is their sustainability, and how Birkenstock uses their sustainability as an advantage to differentiate from competitors. Birkenstock uses very sustainable materials in their footwear, such as cork, leather, canvas, Birko-Flor® and more. Using these materials, Birkenstock can create a durable and sustainable product that can be reused and minimize its global footprint. Mainly within their sandals, Birkenstock has created sandals that are meant to be resoled, reducing waste, increasing longevity, and being cost-effective. Additionally, Birkenstock has ensured their production of footwear is environmentally friendly. Birkenstock has made their factories energy efficient using renewable energy, while also using ecological packaging, having compact packaging, efficiently using space during transport and cutting down on CO2 emissions. This focus on sustainability will push the business forward as demand for sustainable products gain momentum around the world. Birkenstock has shifted its recent focus to the Asian market. Recently, Birkenstock has started to focus on expanding its presence in the Asian market, and as of Q3 FY 2024, Asia has contributed 11.3% of the total revenue, which is a small portion compared to the Americas and Europe. I believe Asia has large potential to start contributing more revenue to Birkenstock, increasing total revenue and its share. In 2023, Asia accounted for more than half of the world's consumption of footwear, at a large share of 54.7% in 2022, compared to North America’s 13.4% and Europe’s 13.9%. Furthermore, Birkenstock has brought on a new manager to target Asia. In our view, such moves are a good indication of management’s desire to capitalize on the ever large Asian footwear market. I believe Asia will continue to contribute more to the total revenue in the medium term, and accelerating growth there would increase momentum. Birkenstock Investor Presentation 2024 Financial Analysis   Birkenstock Investor Presentation 2024 Based on August 2024 Investor Presentation, the company’s financial performance has been great, showing improvements in key categories. Comparing the EBITDA from YTD Q1-Q3 from FY23 to FY24, the company grew this metric at an 11.11% YoY rate, but more impressive was the company’s large revenue growth of 20.77% YoY rate in the same period from 2023 to 2024. Net Profit and EPS all trended in the right direction, though margin has declined a tad bit. These results demonstrate the company’s ability to grow in a challenged economic environment, and demonstrate a good foundation for the company to work from. Valuation DCF Valuation Model I conducted a DCF on Birkenstock to determine the value of the stock. I assumed that the Free Cash Flow would grow on average at 12%, which is half of the company’s cash flow CAGR over the past 3 years. I took on a more conservative approach, and assumed a 12% growth rate for the next 7 years, which seems achievable given the strong business drivers. A terminal growth rate of 3% was used as a proxy for inflation and GDP growth, as well as the view that the company will keep growing as it has done historically. With these assumptions, the model implies an intrinsic value per share of $77.21, which represents a large 52.1% upside from current levels. Risk From Competition Birkenstock faces substantial risk from competition, as the company operates in a very competitive footwear market. Their main competitors are Teva, Chaco, and Keen, which all have products similar to Birkenstock. Managing competitive risk is crucial in the apparel/footwear industry as changes in consumer preference and inability to innovate new designs can ruin a brand rather quickly. However, Birkenstock is able to stand out from the competition through their unique sole construction, the use of latex and cork, and their branding/design. Teva, Chaco, and Keen all predominantly use a mix of rubber and polyurethane and EVA foam. This difference separates Birkenstock from their competition, as their soles will mold to the wearers feet. The sole of some products can also be resoled. The difference in sole material helps Birkenstock remain distinct in the new niche of the footwear/sandal market. Thus, Birkenstock’s unique product differentiation mitigates the risks of competition. Recommendation/Conclusion  With strong tailwinds for the business, I recommend a “BUY” for Birkenstock Holding plc as the valuation presents a 52.1% upside for Birkenstock shares. Though Birkenstock faces stiff competition, I believe these risks are minimal and can be negated through its brand and product differentiation. Additionally, many of Birkenstock’s business drivers are strong, especially as management plans to capitalize on untapped markets in Asia. Birkenstock has large potential, and I will continue to follow this company and update readers based on them.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2477537085"}