GENERAL ANALYSIS
Company Description
Birkenstock, a German footwear establishment with roots dating back to 1774, has forged a prominent presence in the industry. The company has garnered renown for its distinctive sandals, crafted with a fusion of cork and rubber soles.
Birkenstock's product portfolio extends beyond sandals, encompassing a diverse range of footwear, including boots, clogs, and sneakers. Operating within the fiercely competitive footwear industry, Birkenstock faces adversaries primarily among fellow sandal manufacturers such as Teva, Chaco, and Keen. Additionally, it contends with manufacturers of comfort-focused shoes like Allbirds and Crocs.
In spite of the formidable competition, Birkenstock persists as a coveted brand, celebrated for its sandals' unmatched durability and comfort. Over time, these sandals have evolved into a fashion mainstay for customers.
In a significant turn of events in 2022, Birkenstock underwent acquisition by the private equity entity, L Catterton, for a substantial sum of 4 billion euros. This acquisition symbolizes the recognition of Birkenstock's latent potential and the surge in its popularity. L Catterton boasts a track record of astute investments in thriving consumer brands and is expected to play a pivotal role in expanding Birkenstock's market reach and overall business growth.
However, Birkenstock confronts a couple of notable challenges. Firstly, the company's reliance on a singular product category, namely sandals, exposes it to potential risks, necessitating a strategic diversification of its product portfolio. Secondly, the premium pricing of Birkenstock sandals, compared to most competitors, poses a pricing challenge. The company faces the task of rendering its products more accessible to a wider consumer base without compromising the hallmark quality for which it is renowned.
Notwithstanding these challenges, Birkenstock retains its esteemed reputation as a purveyor of high-quality and supremely comfortable footwear. With a foundation rooted in quality and comfort, the company is poised for sustained growth in the foreseeable future. The prospect of an initial public offering (IPO) looms as a strategic avenue that may expedite Birkenstock's trajectory toward further expansion.
FINANCIAL ANALYSIS
Introduction
In this section of the analysis, we will conduct a comprehensive assessment of Brikenstock's financial statements and performance metrics. This in-depth examination will enable us to assess the company's historical and recent performance, thereby facilitating the acquisition of valuable insights into its future prospects and investment potential.
Liquidity
Liquidity pertains to the intrinsic capability of an asset to be swiftly and easily converted into cash, enabling the settlement of immediate financial obligations and liabilities. The analysis of liquidity predominantly relies on three fundamental measures: the current ratio, the quick ratio (also known as the acid-test ratio), and the cash ratio. These metrics serve as crucial barometers of a company's ability to meet its short-term financial commitments. Notably, a ratio exceeding unity is generally perceived as a favorable indication of robust liquidity.
Current Ratio (CR): The current ratio scrutinizes the extent to which a company's current assets, defined as assets amenable to conversion into cash within a one-year timeframe, can offset its current liabilities. A CR greater than 1 implies that the company possesses ample current assets to meet its immediate obligations.
2. Quick Ratio (QR): The quick ratio offers a more stringent evaluation of liquidity by considering only the most liquid assets within the current asset pool. These encompass cash, cash equivalents, accounts receivable, and short-term investments.
3. Cash Ratio (CR): The cash ratio is a highly focused gauge of a company's immediate liquidity position, emphasizing its ability to meet short-term obligations with cash and cash equivalents exclusively.
When scrutinizing Birkenstock's liquidity over the past five years, we discern notable trends and fluctuations within the company's current ratio. The current ratio, as a pivotal indicator of short-term liquidity, offers insights into Birkenstock's capacity to meet its immediate financial obligations.
In 2018, Birkenstock's current ratio stood at a robust 1.30, indicative of a favorable liquidity position. However, in the subsequent year, 2019, there was a discernible decline in the current ratio, which dropped to 1.08, albeit still above the crucial threshold of 1. This reduction raised some initial concerns about the company's short-term liquidity, but it remained within an acceptable range.
The year 2020 witnessed a further modest decrease in Birkenstock's current ratio, which settled at 0.95, reflective of the intricate balance between assets and liabilities. This diminishing trend continued into 2021, as the current ratio registered at 0.97, indicating ongoing considerations for liquidity management.
In 2022, there was a fractional improvement in the current ratio, albeit still below unity, as it reached 1.02. This modest increase might suggest that Birkenstock made efforts to enhance its liquidity position, although challenges remained.
In the most recent year, 2023, Birkenstock's current ratio notably dropped to 0.92, marking a dip in its liquidity performance. This decline warrants attention and underscores the importance of effectively managing current assets relative to current liabilities.
It is essential to underscore that throughout this five-year period, Birkenstock's current ratios have generally remained above the critical threshold of 1, implying that the company consistently maintained a degree of liquidity that would enable it to fulfill its immediate financial obligations. However, the diminishing trend in recent years necessitates vigilant monitoring and strategic measures to optimize the company's liquidity position in the future. Liquidity management remains a pivotal consideration for Birkenstock as it navigates the dynamic landscape of the footwear industry.
Now looking at Birkenstock’s quick ratio figures, it can be concluded that the quick ratio exhibits fluctuations over the analyzed period, with values below the critical threshold of 1 apparent in 2019 and 2022. This data suggests marked variations in the company's ability to cover short-term liabilities with its most liquid assets. However, it's important to note that, overall, Birkenstock demonstrates sufficient liquidity to repay short-term debt obligations. The company's efforts to enhance its short-term liquidity are evident in the substantial improvement in the quick ratio for the most recent year, 2023. This underscores the importance of proactive liquidity management to maintain consistent financial stability and preparedness for short-term financial commitments.
Birkenstock's cash ratio, a conservative measure of liquidity that concentrates on the company's ability to meet short-term obligations with its readily available cash resources, reveals distinctive trends over the five-year period.
In 2018, Birkenstock exhibited a cash ratio of 0.012, which indicates that the company held limited cash resources relative to its current liabilities. This suggests that Birkenstock might have faced some challenges in addressing short-term obligations solely with cash on hand.
In 2019, the cash ratio remained at 0.012, signifying the company's consistent position with regard to cash resources in relation to current liabilities.
However, in 2020, there was a slight reduction in the cash ratio, which stood at 0.005, indicating a relative decrease in the cash position compared to short-term liabilities. This decrease might have raised concerns about the company's ability to repay immediate debts with available cash.
In 2021, Birkenstock showed an improvement in its cash ratio, reaching 0.016. This suggests an increase in cash reserves, aligning the company more favorably with regard to liquidity.
In 2022, the cash ratio showed further improvement, registering at 0.02. This was indicative of the company's ongoing efforts to bolster its cash resources and enhance its short-term liquidity position.
In the most recent year, 2023, Birkenstock's cash ratio was recorded at 0.01, showing a slight decrease in the cash position relative to current liabilities. This decline underscores the importance of effective liquidity management, particularly in ensuring a sufficient cash cushion to meet short-term obligations.
PROFITABILITY
Let’s look into the financial analysis of Crocs Inc. by examining key profitability indicators. These indicators provide invaluable insights into the company's ability to generate returns on equity, invested capital, as well as its operational efficiency and financial performance.
1.Return on Equity (ROE): ROE measures the efficiency with which a company utilizes the resources invested by its shareholders to generate returns. It is a vital indicator of a company's profitability in relation to its equity base.
ROE= Net Income/Shareholder’s equity
2. Return on Invested Capital (ROIC): ROIC assesses the return earned by the company on the total capital invested, showcasing its efficiency in allocating capital to investments.
ROIC= Net Operating Profit/Invested Capital
3. Net Profit Margin: The net profit margin measures the profitability of a company's operations by evaluating the percentage of profit generated after deducting all expenses, including operational, financing, and tax-related expenses.
Net Profit Margin= Net Profit/Net Revenue
4. Net Revenue: Net revenue represents the total revenue generated by the company from its operations during a specific period. It factors in any consumer discounts and allowances.
Net Revenue= Total Revenue- Consumer Discounts
In assessing Birkenstock Company's Return on Equity (ROE) over the past years, we observe distinctive trends:
In 2018, the ROE stood at -66.61%, indicative of challenges in generating returns on shareholder equity.
In 2019, there was a slight improvement, with the ROE at -132.8%. However, profitability remained a concern.
The year 2020 witnessed a notable decrease, with the ROE at -358.5%, signifying significant challenges in that fiscal year.
Subsequently, in 2021, Birkenstock achieved a remarkable turnaround, with the ROE soaring to 410.5%, demonstrating a significant improvement in value generation.
In the most recent year, 2022, the ROE continued to rise, reaching 21.9%. This suggests that the company maintained a favorable trend in generating value for its shareholders.
Financial analysis of Birkenstock Company's Return on Invested Capital (ROIC) over the specified years:
In 2018, Birkenstock reported an ROIC of -57.9%, indicating a challenge in effectively allocating its invested capital to generate returns.
The ROIC for 2019 remained negative at -61.2%, signifying continued difficulties in capital allocation and profitability.
In 2020, the situation slightly worsened, with the ROIC at -62.2%, reflecting ongoing challenges in optimizing capital investments.
The year 2021 continued to pose challenges, as the ROIC remained negative at -26.9%, indicating the company's continued efforts to improve its capital allocation efficiency.
In 2022, Birkenstock achieved a significant turnaround, with the ROIC turning positive at 4.7%. This signified a notable improvement in the company's ability to generate returns on its invested capital.
However, in 2023, the ROIC dropped to -34.4%, suggesting a decline in the efficiency of capital allocation, but the company still demonstrated resilience in addressing this challenge.
The upswing in ROIC in 2022 indicates positive progress, while the decline in 2023 underscores the ongoing work to optimize capital allocation and profitability.
Financial analysis of Birkenstock Company's Net Profit Margin over the specified years:
In 2018, Birkenstock reported a Net Profit Margin of 10.2%, indicating a positive profitability after deducting all expenses from both operational and financing activities, as well as taxes.
The following year, 2019, witnessed a decline, with the Net Profit Margin decreasing to -12.3%, signifying a loss.
The situation did not improve in 2020, with the Net Profit Margin at -7.5%, reflecting ongoing profitability challenges.
In 2021, the Net Profit Margin remained negative at -4.0%, indicating the company's continued difficulties in achieving profitability.
However, in 2022, Birkenstock made significant progress, with the Net Profit Margin turning positive at 0.7%. This marked a notable improvement in the company's profitability.
In 2023, the Net Profit Margin remained positive, but decreased to -4.5%, suggesting continued efforts to enhance profitability.
This analysis demonstrates the company's journey in terms of profitability, with fluctuations over the years. The positive turn in 2022 indicates a notable improvement, while the decline in 2023 underscores the ongoing work to optimize profitability. These changes in the Net Profit Margin are likely influenced by various factors, including operational efficiency, cost management, and financial strategies, which play a pivotal role in determining a company's financial performance.
MULTIPLES ANALYSIS
Multiple analysis is a valuable tool. Multiple analysis is widely used by experts to evaluate the company’s performance and valuation, by comparing it with its direct competitors and the industry.
Comparative Valuation: It enables a direct comparison of Birkenstock's valuation to its industry peers, offering insights into its relative valuation.
Investor Perception: It provides a view into how investors are pricing Birkenstock's stock and their expectations regarding future performance.
Benchmarking: It assists in benchmarking the company's performance against industry competitors, which can inform strategic decisions.
For multiples analysis, let's value multiples such as EV/EBITDA and P/E ratio, to gain insights into how the market values Birkenstock compared to its competitors.
EV/EBITDA Ratio: Birkenstock's EV/EBITDA ratio stands at approximately 23.81, indicating that investors value the company at about 23.81 times its EBITDA. A lower EV/EBITDA ratio may imply that investors are currently paying less for each dollar of EBITDA generated by Birkenstock. This could be attributed to various factors, including expectations about future growth, risk considerations, or other market dynamics.
P/E Ratio: The P/E ratio for Birkenstock is approximately 42.77, implying that investors are willing to pay roughly 42.77 times the current stock price to become shareholders in the company. The market's perception of Birkenstock's earnings may be seen as more expensively priced.
VALUATION
We adopted a Discounted Cash Flow model approach in order to estimate the value of the company, even if there is data available just for the last three years.
The WACC stands at 8.27%, assuming a risk free rate at 5.0%, an Equity Risk Premium at 5.0% and a Beta of 0.8. Data for the Beta was not computed, however we assumed Corcs as a direct competitor and we delevered its Beta, to avoid the effect of the different capital structure. The assumptions on the spread are based on Fitch ratings: Birkenstock's rating is two places higher than its closest peer, Golden Goose S.p.A. (B/Stable), the company also has a similarly focused and profitable product portfolio. Unlike Golden Goose, Birkenstock does not develop its own retail store network and therefore we do not leverage our leverage into leases. The two-notch rating difference reflects Birkenstock's three times larger scale and its positioning of products with less fashion risk. We assess Birkenstock's credit profile to be weaker than Levi Strauss & Co (BB+/Stable), which is also highly focused on one brand but has a much larger scale and product diversification than. This, combined with significantly lower leverage, less than 3.5x lease-adjusted, results in a higher rating for Levi Strauss. Birkenstock is smaller, has a less diverse product portfolio, and is more leveraged than home improvement and personal care products maker Spectrum Brands, Inc. (BB/Negative). This demonstrates a one-step gap between the two companies even though Birkenstock's profits are significantly higher. Compared to ACCO Brands Corporation (BB/Stable), one of the world's largest designers, distributors and manufacturers of academic, consumer and professional branded products, Birkenstock is small, significantly higher but with significantly higher profits. Despite the two companies' comparable leverage, we believe ACCO Brands' larger scale and commitment to keeping net debt below 2.5 times EBITDA warrants a higher rating. Nomad Foods Limited (BB/Negative), a frozen foods company, operates in the essential category and is therefore less subject to changes in consumer preferences. We believe this warrants a higher rating despite comparable leverage and significantly lower EBITDA margins. We assess Birkenstock's credit profile to be stronger than that of Italian furniture maker International Design Group S.p.A. (IDG; B/ Stable), which has several acquisitions that have limited its deleveraging trajectory. Birkenstock also benefits from slightly larger scale and more resilient consumer demand, which combined with strong profitability, provides greater visibility into Birkenstock's deleveraging prospects. This ends up in a BB- rating and an assumed spread of 3%.
For the FCF estimations we assumed a growth of around 30% for 2023, deriving from the success of different marketing campaigns and the positive trend we saw with the Barbie film, with a decreasing growth in the next few years, stabilizing around 5-8%. We kept strong EBIT margins that fluctuated around 30% and a constant tax rate of 18%.
We assumed D&A and CapEx to remain stable, ending up with a FCF around 300-400 million per year. The assumptions for the growth stays at 2.5% for the Gordon Growth method, returning an implied share price of $34, 10% below the closing price.
We also analyzed different scenarios, supposing that our computed WACC is not exactly correct and maybe even the terminal growth rate, and as you can see below to justify today’s price BIRK should see a terminal growth rate of 3.5%, and a WACC of below 8%. From our point of view BIRK does not present any reason to support a TGR of 3.5%, given the stability of the sector, meaning that a price over $40 cannot be justified.
PIOTROSKI SCORE
The Piotroski Score is a financial scoring system developed by accounting professor Joseph Piotroski. It is designed to assess the financial strength and health of a company by analyzing various accounting and financial metrics. The score ranges from 0 to 9, with a higher score indicating a stronger financial position. Each component of the score provides insight into different aspects of a company's financial health and helps investors, analysts, and researchers make more informed decisions.
The Piotroski Score typically includes nine different financial metrics and fundamental factors, with one point awarded for each favorable outcome. Here's an overview of the factors that make up the Piotroski Score:
Net Income: Companies with positive net income in the current year receive one point.
Operating Cash Flow: A positive operating cash flow is another favorable indicator and earns the company one point.
Return on Assets (ROA): If the ROA is positive in the current year, it receives one point. ROA measures how efficiently a company uses its assets to generate profit.
Quality of Earnings: A point is awarded if a company's cash flow from operations is greater than its net income. This indicates higher quality of earnings.
Leverage: If the long-term debt-to-assets ratio is lower than the previous year, the company gets one point. Lower leverage implies less financial risk.
Current Ratio: If the current ratio (current assets divided by current liabilities) is higher than in the previous year, one point is given. This indicates improved liquidity.
Change in Shares Outstanding: If there is no issuance of new shares or the number of shares has decreased, one point is awarded. This factor assesses whether the company is diluting existing shareholders.
Gross Margin: If the gross margin is higher in the current year than the previous year, one point is given. An improving gross margin suggests a stronger competitive position.
Asset Turnover: A point is awarded if the company's asset turnover ratio (revenue divided by average total assets) is higher than in the previous year. This indicates increased efficiency in asset utilization.
By considering these nine factors, the Piotroski Score provides a comprehensive view of a company's financial health. A higher score is generally associated with companies that exhibit positive financial trends and stronger fundamentals, making them more attractive to investors. Conversely, a lower score may suggest financial distress or deteriorating financial health.
Looking at Birkenstok’s financial factors for analyzing its Piotroski score,
Analyzing company’s profitability using the Piotroski Score framework:
Net Income: Birkenstock reports a negative net income in the current year (2023), which is -5.622. This is unfavorable for profitability.
Return on Assets (ROA): The company also has a negative ROA of -3.773. This suggests that it is not efficiently utilizing its assets to generate profits.
Operating Cash Flow: The operating cash flow is negative at -1.07. This is an unfavorable sign as it indicates challenges in generating positive cash flow from operations.
Quality of Earnings: On a positive note, the operating cash flow is greater than the net income, indicating better quality of earnings.
Now, let's assign points based on the Piotroski Score criteria for profitability:
Net Income: Since the net income is negative, Birkenstock does not receive a point for this factor.
ROA: The negative ROA also means no point is awarded for this factor.
Operating Cash Flow: The negative operating cash flow results in no points for this component.
Quality of Earnings: Birkenstock receives one point for this factor because the operating cash flow is greater than the net income.
So, in the profitability aspect, Birkenstock earns 1 point
Analysis Birkenstock’s Leverage assessment for Piotroski score:
Long-term Debt: Birkenstock's long-term debt decreased slightly from $17.05 in 2022 to $16.779 in 2023. This indicates a marginal reduction in financial leverage, which is a favorable sign. Hence, the company earns one point for this component.
Current Ratio: The current ratio decreased from 1.02 in the previous year to 0.92 in the current year (2023). This decrease in liquidity is a concerning trend, as it suggests potential difficulties in meeting short-term obligations. Unfortunately, no point is awarded for this factor.
Change in Common Stock: The net common stock decreased from $76.3 in 2022 to $73.21 in 2023, indicating a reduction in the number of shares. This is a positive indicator, as it suggests the company is not diluting existing shareholders. Therefore, Birkenstock earns one point for this factor.
Gross Margin and Asset Turnover Analysis:
Gross Profit Margin: The gross profit margin decreased from $60.818 in 2022 to $51.414 in 2023. This signifies a decrease in profitability regarding the company's sales. Unfortunately, no point is awarded for this factor.
Asset Turnover Ratio: The asset turnover ratio decreased from 0.9895 in 2022 to 0.8272 in 2023, indicating a reduction in the efficiency of asset utilization. Regrettably, no point is awarded for this component.
In the Leveraging and Liquidity section, Birkenstock earns a total of one point, primarily due to the reduction in long-term debt. However, the liquidity situation and asset utilization show room for improvement.
In conclusion, based on the analysis of the Piotroski Score components for Birkenstock, the company receives a score of 3 out of 9 on the Piotroski score scale. This result suggests that Birkenstock faces several financial challenges and weaknesses in its current financial health. The score of 3 indicates that there are significant areas of concern that require attention and potential improvements to strengthen the company's overall financial position. It's crucial for Birkenstock to address these issues to enhance its financial stability and address the weaknesses that have been identified.
RISKS
Analysis all potential factors that are a risk for the Birkenstock firm as per the overall company analysis so far:
Supply Chain Dependency and Disruptions: Birkenstock's reliance on specific materials or suppliers may leave it vulnerable to supply chain disruptions. Any significant interruption in the supply of essential materials or components could adversely affect the company's production and its ability to meet customer demand. Ensuring a diversified supplier base and developing contingency plans for potential disruptions is essential to mitigate this risk.
Sustainability Concerns: The global footwear industry is facing increased scrutiny and consumer demand for sustainability and ethical practices. Birkenstock needs to address these concerns to remain competitive and maintain its brand reputation. Failure to adopt eco-friendly practices, sustainable materials, or address concerns related to labor and environmental impact could lead to backlash and a loss of market share.
Financial Performance and Investor Confidence: While 2021 may have been an extraordinary year for Birkenstock, maintaining positive financial trends and reliability to investors is crucial. The company should work on reversing any unfavorable financial metrics and demonstrating consistent financial performance to build and maintain investor confidence.
Competition and Innovation: The footwear industry is highly competitive, with new entrants and established players constantly introducing innovative products and marketing strategies. To sustain growth and profitability, Birkenstock should stay ahead of the competition by investing in product development, marketing, and innovation. Adapting to changing consumer preferences and market dynamics is vital to maintain its market position.
Global Economic Factors: Birkenstock operates in a global market, and economic factors such as inflation, exchange rates, and economic downturns can impact its business. The company should maintain a keen awareness of economic conditions and have strategies in place to navigate potential challenges.
Geopolitical Risks: Global events and political factors can also affect the company's operations. Trade disputes, tariffs, and geopolitical tensions can disrupt supply chains and markets. Birkenstock should monitor and adapt to these risks and possibly diversify its operations when necessary.
In summary, Birkenstock, like any company, faces various risks and challenges, including supply chain disruptions, sustainability concerns, the need for financial reliability, competition, economic factors, and geopolitical risks. Addressing these issues proactively and maintaining a strategic focus on innovation and sustainability will be crucial to the company's long-term success and resilience in the dynamic footwear industry.
Appendix I: Discounted Cash Flow model
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