- New York listing at $9bn valuation
- Past footwear floats have stamped on shareholder cash
German sandal maker Birkenstock (US:BIRK) continued a run of disappointing floats after falling 13 per cent on the New York Stock Exchange on the first day of trading. Its opening price of $46 (£38) gave it a market capitalisation of $8.6bn. The question now is whether it tightens its straps and recovers or if the float price was a high point. Based on past examples, there are plenty of obstacles Birkenstock must navigate to be a public success.
An unlikely pair
Birkenstock's IPO prospectus urges investors to buy into a “revered brand” that “transcends geography, gender, age and income” and fulfils a “primal need of all human beings” (it is easy to forget they are talking about orthopaedic arch support).
With its alternative heritage, Birkenstock appears to have plenty in common with Dr Martens (DOCS), whose boots found favour with punks and skinheads in the 1970s. From an investment perspective, there is also plenty of overlap. Both groups sell a narrow range of products which used to be popular with subcultures but are now mainstream. Both are also highly seasonal, premium but not luxury, and have a long heritage – Birkenstock was founded in 1774 while Dr Martens’ origins date back to the second world war. Both are also coming to market via private equity owners.
Given the similarities, it is worth paying attention to Dr Martens’ dismal performance since its IPO in January 2021. The bootmaker has issued three profit warnings this year alone and has lost 70 per cent of its value since its market debut.
Some of Dr Martens’ woes have been caused by operational blunders, and do not necessarily reflect deep-rooted problems. A bottleneck of inventory at a Los Angeles distribution centre, for instance, resulted in lost revenue and £15mn of extra costs in FY2023, and is weighing on this year’s numbers too.
Other issues look less fixable, however. Dr Martens came to market with an enviable adjusted Ebitda margin of 29 per cent, which it managed to maintain in FY2022. However, profitability faltered in 2023 and Peel Hunt concluded that earlier figures “simply did not reflect the required level of investment to sustainably maintain the double-digit growth rates that the business was seeking to achieve”. In other words, it was over-earning and under-investing.
Investors should keep a close eye therefore on Birkenstock's margins – which reached a roomy 35 per cent in 2022 – particularly as operating costs shot up by 36 per cent in the first half of 2023 to €227mn (£197mn) on the back of sales growth of 19 per cent.
Rebooting demand
High costs are not the only thing to worry about, however. In Dr Martens' latest results, management admitted that it had ordered “too much inventory for America given the tough environment and our poor execution”. This is an understatement: stock levels more than doubled between March 2022 and March 2023, and sales in America have yet to show any sign of improvement.
Given the nature of Dr Martens’ products, this surplus of stock shouldn’t prove disastrous. Unlike retailers such as Asos (ASC) and JD Sports (JD.), it sells very similar shoes every year, so the chance of huge write-offs is low. However, the management’s misplaced optimism spotlights a key issue for shoemakers with a distinctive style: public opinion.
Mono-brand models are “inherently exposed to fashion risk and likely to hit a demand ceiling at some point”, according to Numis analyst Alison Lygo. This can be seen over and over again: companies list when they are hot, only to encounter rapidly slowing demand and excess inventory.
Crocs (US:CROX) swung from three years of triple-digit growth to a decline of 15 per cent in 2008, Lygo flagged, while Skechers' (US:SKX) revenue began to decline in 2002 following two years of growth in excess of 40 per cent. But since those dips, both companies have soared in sales terms. Skechers has seen sales rise from $940mn two decades ago to over $7bn. Crocs has ridden the ugly shoe trend well enough to triple its sales compared with 2019, to $3.6bn. Birkenstock's own revues last year were €1.2bn.
However, relying on fashion trends is far from relaxing for investors, and brands such as Crocs and Skechers are still associated with extreme share price swings.
The big test for shoe companies, therefore, is what they do when brand heat inevitably starts to cool. Lygo is ultimately optimistic about Dr Martens, saying there is still ample headroom for more moderate growth. She uses Timberland as an example of a brand that has navigated peak popularity and survived until maturity.
However, the path to staying relevant and protecting brand equity, while also shifting excess stock, keeping costs down and rewarding shareholders, is not an easy one. Dr Martens knows this already. Birkenstock might be about to find out.
