Birkenstock (BIRKEN 29s; NR/B+ Pos/BB Pos (now)) 3Q24 (3m to June)

Continuing firm results from the sandal retailer - Kering and Burberry should take notes - but caution on 29s that seem more keen to price to operating metrics vs. narrow market Birkenstock operates in. S&P was optimistic when it upgraded in June adding " the non-sandal products (i.e. closed-toe shoes now represent about 25% of total sales versus 14%-19% in second-quarter 2023), and slightly more than 50% of the group's DTC sales, with six of the 10 top selling products being non-sandal products." Fitch despite moving to pos. outlook this afternoon is less convinced saying "company's product portfolio remaining reliant on a limited number of models" and noting "several brands of copycat products at lower price points are emerging". We will be looking out for any further mentions of that in earnings call on diversification.

'29 bondholders have done well thus far; it was issued in 2021 on Caa1/CCC+/B- ratings and has come in 300bps since. At OAS+172 (working out to 1.8yrs) it may still show value if it can show progress on above. It already trades away from ratings.

• Q3 revenue at €565m (+19%yoy in constant currency and gross terms), gross margin to 59.5% (-220bp) and adj. EBITDA margin at 33% (-140bps). Confirms FY guidance for revenue growth of +20% (cc) and adj. EBITDA margin of 30-30.5% - consensus waiting there.
• Q3 numbers are largely in line, net income at €92m a slight miss on c€98m. Stock is -12% in pre-market but coming off a 25% YTD rally and at a 1YF P/E of 33x is baking continued above peer growth.
• BY region Americas (50% of sales) +15%, Europe (38%) 19%, APMA (11%) (APAC, ME and Africa) +41%. B2B (60% of sales) +23%, DTC (40%) +14%.
• Selling & distribution costs decreased to 26.4% of sales (-220bps) thanks to more growth in B2B but G&A costs increased to 4.5% (+160bps) with little explanation.
• net WC was at €674m up from €587m but its noting down as % of revenue (at 39%).
• It's reporting net debt (incl. leases) at €1.1b down from €1.6b last year and helped by cash generation of €229m this qtr. It 2.1x levered (vs. 3.3x last year & 2.6x last qtr). Reminder nearly all in loans with only the €29s in public bond markets.
• Credit ratings are held down by not only single brand exposure but also lack of product diversification. On that point its added "revenue growth benefited from increased sales of closed-toe silhouettes, which grew at over twice the brand average".