“Your brand is the single most important investment you can make in your business”
– Steve Forbes, Forbes Magazine
arvy’s teaser: Birkenstock, the iconic German shoe manufacturer with a 250-year tradition, has reignited its fire. Having improved its operational excellence and brand strength while achieving impressive growth, the company recently went public.
1774.
The founding year of a German shoemaker.
This laid the foundation for an orthopedic doctrine based on the concept of “natural walking”, as the curvatures in the soles of the shoes mimic the experience of walking on dirty or porous ground. This philosophy has been at the heart of their footwear manufacturing ever since, particularly in sandals, with an emphasis on function and quality in every product.
Today, the company can look back on a 250-year history whose growth has been impressively reignited in recent years (chart 1). In 2021, the shoe manufacturer was acquired by private equity firm L Catterton (40% owned by LVMH).
They refined the former rough diamond, improving operational efficiency and brand awareness.
In 2023, the company was polished up and IPO’d in the US.
A beloved and enduring brand went public.
Birkenstock.
Chart 1: Birkenstock’s revenue growth over the last eight years
Source: Quartr
IPO – Initial Public Offering
First things first. Are IPOs relevant?
An IPO is the first placement of a company’s shares on the stock exchange. It is important to track them because 80% of the most successful stocks are usually companies that have gone public within the last 10 years.
Why?
- The strongest growth phase takes place in the first years after the IPO
- Capital gained through the IPO enables expansion
- Management is on fire and shows its entrepreneurial excellence
- Economies of scale are utilized.
Navigating this landscape requires caution. Keep in mind that the goal is to price the IPO as high as possible so that the company and founders raise as much money as possible and have to give up as few shares as possible.
Thus, a key risk is that most IPOs are happening during very strong risk-on periods, such as 2020/2021, when investors were willing to both pay very high valuations and take a lot of risk, respectively (chart 2).
Then they are maliciously labeled with another name.
“It’s Probably Overpriced”.
Chart 2: Timing is everything: The IPO class of 2020/21 has struggled since going public
Source: Yahoo Finance, Chartr, as per Feb 2023
Brand Strength
Now to “Birks” whose gross margin is 60 %. That means they produce something for 4 euros and sell it to you for 10 euros. Not bad for sandals, right?
This begs the question, how could a sandal manufacturer with expensive products survive for 250 years with such a simple idea?
What about imitators? Cheap copies?
It is all about the moat of brand strength. This is also reflected in the interest of LVMH and its private equity arm in Birkenstock back in the day. The strength of a brand is a very strong moat in which to build on reputation, heritage and legacy – something that cannot be achieved overnight. The ultimate champion in this segment remains Hermès.
How has Birkenstock achieved this?
Over the years, they have developed a universal appeal that attracts a diverse, global fan base.
Their dedication to crafting purpose-driven products with integrity has gained them the trust and loyalty of customers throughout the world. 90% of buyers express a desire to buy again and over 40% would not consider any other brand when it comes to sandals. The company also offers products in a wide price range, from €40 for entry-level models to over €1,600 for high-end collections (Birkenstock x Manolo Blahnik).
Fun fact: more than 70% of Birkenstock shoppers are female, although many of the brand’s most iconic sandals are unisex. The average Birkenstock shopper in the US owns 3.6 pairs.
The Birkenstock brand’s ideals, authenticity, and attention to craftsmanship align with changing consumer trends. The company’s shoes promote a natural walking style with appropriate foot support, are manufactured entirely in Germany, and are produced with great concern for the environment. As customers prioritize usefulness and quality above fast fashion, Birkenstock remains an appealing option for many.
A “Good Story” is in the making.
What about the “Good Chart”?
Chart 3: Everybody loves Birks, age and income breakdown of Birkenstock customers
Source: Statista, Birkenstock
IPO Base
When it comes to investing in an IPO, new issues do not play by the usual rules.
Companies going public for the first time attract the attention of investors. This often leads to unusual and brand-new chart patterns. Volatility can increase as investors assess the demand for the new stock. Nevertheless, these cases present opportunities if you can spot the right characteristics amidst the price and volume trends.
With so many eyes on new listings, we at arvy are not very keen on getting involved in IPOs and prefer to focus on winners that have been winning over a longer period. Still, we like to keep an eye on them as they are a good indicator of the overall health of the market and the risk appetite of market participants.
Birkenstock seemed to have had a successful IPO and a subsequent sideways movement of the share price, so that the high valuation was confirmed and accepted by the market. A constructive IPO base, a consolidation, has now formed, which has aroused investors’ curiosity.
The current breakout on high volume would confirm the “Good Story” with the last missing piece.
A “Good Chart”.
Chart 4: Birkenstock since IPO (Chart by MarketSurge)
Source: MarketSurge
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