When you think of growth stocks, you probably don't think of footwear makers, but the industry has had a surprising number of big winners in recent history. Nike (NKE -0.68%) is likely the best known of the group, and the Swoosh has delivered monster returns over its history.
But more recently, other footwork stocks have shined. These include Deckers Outdoor, the parent of the Ugg, Hoka, and Teva brands; Crocs; and Skechers USA. All have outperformed both Nike and the S&P 500 by a wide margin over the last decade, as the chart below shows:
Unlike much of the broader apparel industry, footwear companies benefit from strong branding. And demand for casual footwear has been strong over the last decade, driven in part by the remote-work trend kicked off by the COVID-19 pandemic.
Now, Birkenstock Holding (BIRK -1.86%) has become the latest company to enter the fray. The 249-year-old company went public on Wednesday, but the debut was not so well-received; the stock finished the session down 12.6% from its $46 listing price.
However, investors shouldn't write off Birkenstock on the basis of a weak opening day. Let's take a closer look at what the footwear stock offers to see if it can repeat the performance of peers like Deckers.
Image source: Getty Images.
A big step forward
Birkenstock has been well-known for its leather sandals for generations, Over the last decade the company has reinvented itself, in part due to the influence of new investors, and its growth has been impressive. Revenue has risen by more than 300% from 2014 to 2022, for a 20% compound annual growth rate, reaching 1.24 billion euros last year.
Its growth took off after the Birkenstock family brought in its first outside management team in 2013. Since then, the company has taken control of its distribution back from third-party partners, launched the Birkenstock.com website, and opened Birkenstock-branded retail stores. It's also expanded its collection of "silhouettes," or footwear designs, and nine of its top 20 products last year were new styles introduced since 2017.
Private equity firm L Catterton took a majority stake in the company in 2021, and has helped accelerate its growth through partnerships with luxury designers like Christian Dior and Manolo Blahnik. The family investment arm of Bernard Arnault, founder of LVMH Moët Hennessy Louis Vuitton, also holds a major stake.
Unlike many IPOs, Birkenstock is also a highly profitable company, with margins that speak to the strength of its brand. In the fiscal year ended in September 2022, Birkenstock reported net income of 187.1 million euros, for a profit margin of 15%, better than sneaker kingpin Nike.
Is Birkenstock a buy?
The market's response to Birkenstock's debut and the double-digit sell-off seems to be more a reflection of the valuation rather than of any major weakness in the business. Birkenstock is going public at a fraught time for consumer discretionary stocks, as major retailers and brands have mostly posted weak results this year. Nike, for example, just reported nearly flat revenue growth in its fiscal first quarter.
As the pandemic winds down, consumer spending has shifted to services like travel and restaurants that were previously off-limits. Spending on products like leather sandals has also been pinched by concerns about inflation. That hasn't seemed to deter Birkenstock. Revenue was up 21% in the first three quarters of its current fiscal year.
Following the stock's sell-off on Wednesday, it now trades at a price-to-sales (P/S) ratio of about 5 and a price-to-earnings (P/E) ratio of around 40. That's still a steep price to pay in the footwear industry, putting Birkenstock in league with On Holding, the fast-growing Swiss running-shoe brand that's on track to grow revenue 46% this year.
Birkenstock expects to use the proceeds from its offering to pay down debt. That should help alleviate some of its interest expenses, which reached 112.5 million euros last year.
Compared to some of its peers, Birkenstock's upside potential seems more limited -- its market capitalization is already similar to those of companies like Crocs, Skechers, and On.
At the stock's current price, investors are better off passing on the Birkenstock IPO for now. However, footwear stocks like this one have a history of rewarding investors who buy on the dip. Keep an eye on Birkenstock to see if it presents the same opportunity.
