Birkenstock floats price hikes to offset new factory costs as shares slide on earnings

United States

Shares of Birkenstock Holding PLC slid nearly 8% on Thursday after the sandal maker reported a surprise fourth-quarter loss amid “subdued customer sentiment” and said it expected a slight hit to margins due to costs related to ramping up a new factory in Germany.

On its first earnings call since its IPO in early October, the German footwear maker BIRK, -7.72% said it had room to raise prices to counterbalance those expenses and what it called “some pressure from inflation” this year.

During the call, Chief Executive Oliver Reichert suggested that Birkenstock customers would be flexible toward any changes it makes to footwear prices. And he said that margins would recover following the company’s investments in the new factory, located in the town of Pasewalk near the Polish border in northeastern Germany.

“So, we have enough leg space to further increase pricing and [help digest] the one-off costs through this factory improvements and the further investment in our capacity,” he said.

“This will give us a completely different situation from 2025 onwards,” Reichert continued. “So, we expect that this growth preparation will be heavily digested within 2024. And then you will see a quick recovering of margins and efficiency and, hopefully, less inflation as well.”

The new factory opened in September. On the call, Reichert said the facility, plus the refitting of another factory in Germany and one in Portugal, would give the company the chance to double its production capacity amid stiff competition with other casual-footwear brands. However, higher prices for basic goods over the past two years have cut into demand for shoes.

According to its IPO filing last year, the 250-year-old company has tried to capitalize on a variety of trends over the years — including health consciousness, a more informal approach to attire, the rise of modern feminism and “the rise of purpose-led, conscious consumption.” Demand, Reichert said on Thursday’s call, was still solid.

“The demand for purpose-driven brands are unbroken,” he said. “It’s a bit of a difference for the desire-driven luxury brands. I think they are much [more heavily] under pressure. We are not. We see growth everywhere.”

Birkenstock’s market debut was one of the bigger IPO flops for a deal of its size in recent years, according to Renaissance Capital. However, shares have risen 14% since the closing bell of the stock’s debut session on the New York Stock Exchange, even as they closed Thursday just 12 cents above the offering price of $ 46.

The company’s results for its fourth quarter, which ended Sept. 30, were mixed. Converted to U.S. dollars, Birkenstock reported a loss of 16 cents a share, compared with a consensus analyst forecast of a per-share profit of 15 cents, according to FactSet data. Revenue of around $ 407 million topped the consensus estimate of $ 385.6 million.

Executives said they expected a “modest headwind” to adjusted EBITDA margins during fiscal 2024, “due to planned ramp-up costs and an initial underabsorption in Pasewalk.”

Still, Jefferies analysts on Thursday called the results from Birkenstock “encouraging,” citing sales gains in North America, and downplayed the margin forecast. The analysts kept their buy rating on the stock, and said Thursday’s stock-price drop represented a buying opportunity.

“We viewed performance as encouraging, particularly the top-line strength experienced in the Americas [up 30% year over year],” they said. “The company’s [full-year adjusted] EBITDA outlook could be viewed as mixed; however, we believe [management] is likely exercising caution.”

In Birkenstock’s earnings release, Reichert said the company’s products transcended near-term market jitters.

“As a footbed company with a unique business model and a proven engineered distribution model, we offer a product with a purpose and that withstands short-term market or fashion trends, because it serves a primal human need — to walk as nature intended,” he said.