German footwear maker Birkenstock (BIRK.US) exceeded analysts' revenue forecasts for the Christmas quarter, but it wasn't enough to sustain Wall Street's optimism. Sales rose 22% year-on-year, and the company benefited from growing demand from U.S. and European consumers accepting higher prices. Still, it posted a net loss, partly due to investments in production capacity.
The news presented by the company today is not exactly new to the market, as Birkenstock, entering the reporting season, released preliminary annual results and forecasts for 2024 a month ago. The company indicated that it stands by expectations and now expects sales of $1.89 billion to $1.91 billion, presenting nearly 18% year-on-year growth.
- Revenues: EUR 302.9 million vs. forecasts of EUR 288.7 million and EUR 248.5 million in 2022
- Adjusted loss per share: EUR 0.09 vs. EUR 0.09
Gross profit margin fell to 61% from 61.7% y/y, with the company citing unfavorable currency effects and insufficient production capacity. The company attempted to cope with the problems by raising prices, but did not final improve margins. In addition, the thesis of supply not keeping up with demand looks precarious in the context of lower margins, and points to some limitations with regard to lifting prices.
Net losses and a difficult path to profitability?
In Q4 2023, the company reported losses of €7.15 million (€0.04 per share). Optimistically, this loss is down from €9.19 million in 2022 (€0.05). However, this is not a very dynamic improvement in business, and sales growth of more than 20% y/y did not help the company reach profitability any faster. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 12% year-on-year to €81 million, with an adjusted EBITDA margin of 26.9% (down from 29.1% a year earlier). Birkenstock intends to improve margins and reach out directly to the consumer, without sharing margins with wholesalers. To achieve this, however, it will have to incur costs.
- The Company is currently working to double its production capacity over the next 3 years to narrow the gap between supply, allegedly not keeping up with demand. However, the company's CEO conveyed that the impact of these strategies will be temporary, and it is planned for the long term
- Regarding the European market, the company indicated that prices have been raised twice and have not met signs of declining demand. Meanwhile, for the first time, closed-toe shoes accounted for a higher percentage of sales than sandals, which was certainly supported by the autumn-winter season.
- In the Asia-Pacific, Middle East and Africa region, revenues grew 47%, compared to 14% growth in the more mature market in Europe and 21% in the US. That's a better result than reported by Nike or Under Armour.
- Since going public, Birkenstock has used some of the proceeds to pay down debt, resulting in Birkenstock's leverage of 2.6 x EBITDA at the end of December, which can be considered a rather conservative result compared to the industry.
Wall Street isn't buying management's optimism
Management conveyed that it is seeing strong demand in wholesale channels, although other retailers are struggling with declining orders. Still, malls and big-box stores are trying to maintain limited inventory levels and are uncertain about the demand outlook. According to the company's comments, wholesalers are increasing their product orders and increasingly opting for earlier deliveries to keep up with demand. However, Wall Street looks to hard data and that shows a disappointing decline in margins, a slight improvement in net loss and higher revenues which may be supported more from higher prices (without positive contribution to margins) than real growth in sales volume.
Birkenstock chart (M15)
The company's shares are trading at the 38.2 Fibonacci retracement of the October 2023 upward wave.
Source: xStation5
