Step Into Profits With This Shoe Company's Stock

While investors are excited over every piece of news about artificial intelligence (AI), how about just laying back, kicking your shoes off, and enjoying the profits from… your shoes?

The German shoe company best known for its sandals, Birkenstock (BIRK), made its first shoe way back in 1774, and listed here in the U.S. last year. Its patented “footbed”—the bulky sole of the distinctive sandals—was the source of its ‘magic’ for literally centuries.

The company’s stock is up about 40% since its IPO last October. Its success came as a surprise to many, since its IPO was widely panned by Wall Street.

How to Turn Around a Centuries-Old Company

Birkenstock’s success actually began back in 2009, when the family-controlled firm hired an outsider, Oliver Reichert, as CEO. When he was hired , the family business was in disarray, with stagnating sales and no coherent plan for the future.

At the time of Reichert’s arrival, Birkenstock was in trouble. But nobody could agree on what exactly to do to fix it. The company veterans wanted to change nothing at the failing company.

However, the family backed Reichert and his ideas to expand the company’s presence. Before long, Birkenstock sandals were seen everywhere, including on high fashion runways and high-end department stores. Under Reichert’s watch, Birkenstock was transformed into an affordable luxury.

The strategy worked to perfection, with the company’s sales more than tripling to $830 million by 2020.

Then, in 2021, Reichert sold a majority stake in the company to L Catterton —a deal that valued the company at about $4.3 billion. L Catterton is backed by French billionaire Bernard Arnault's LVMH(LVMUY).

Since then, Birkenstock has continued raising prices and rolling out higher-end models. It also began cutting out retail partners, while building up its own direct-to-consumer sales. The company had been still focused on a few dozen big distributors and wholesalers around the world. It didn’t have a centralized sales or marketing team, a company-branded website to sell the shoes, or even anything on social media sites.

Birkenstock also expanded its German manufacturing plants, with plans to double production in the next few years to enable a big push into emerging markets, like China and India. Within a couple of years, the company could double its production capacity, from about 30 million pairs a year currently.

Birkenstock in Growth Mode

So, what does the future hold for Birkenstock? 

I believe it holds a lot more growth, since the company seems to be seizing market share from rivals as it expands beyond its traditional cork sandals. 

On May 30, the company raised its earnings targets for the year. Birkenstock surged 11.6% in its best-ever day of trading, and has continued to gain since.

Birkenstock’s sales volumes far outpaced the broader shoe market in 2023, with a 20% gain compared to 4% overall. This year, management increased the full-year sales growth forecast from 17% to 20%.

Birkenstock's overall fiscal second-quarter revenue rose 21.6% to 481.2 million euros ($520.23 million), compared with estimates of 466.1 million euros. Adjusted profit per share came in at 0.41 euros, beating estimates of 0.36 euros.

The growth in revenue was split roughly evenly between increased prices and volume. On the earnings call, management said the average price increase came from “the continued shift to premium products, a favorable channel mix towards direct to consumer, and the targeted sale price increases.”

Its second quarter direct-to-consumer (DTC) revenue grew about 32%, while wholesale revenue rose 19.2%. In the second quarter, Birkenstock opened six new retail stores, bringing the total to 57 as of the end of March. The benefit of selling DTC is that Birkenstock can sell at a higher margin, because there is no middle party taking a cut.

The quality of the Birkenstock brand is seen in its profit margins. Its gross margin last quarter was 57%, while it is forecasting that its adjusted cash profit (Ebitda) margin for the year will be between 30% and 30.5%. As Jefferies analyst Randal Konik put it, “the Birkenstock brand can’t be replicated."

Grabbing a Toe-Hold

The challenge for Birkenstock will be to maintain annual growth, but management is confident it can achieve this by taking market share. Currently, the shoemaker has a mere 1% of the footwear market, according to its IPO prospectus.

The company hopes to increase this share by competing in the closed-toe shoes market. Birkenstock’s closed-toe models include a clog and a new sneaker. In the past year, sales of these silhouettes have climbed 80%, while its Boston clog grew more than 100%. 

The issue now is manufacturing the shoes fast enough, with the closed-toe order book from its third-party distributors more than double from the same period last year. So while the overall global consumer market remains weak, Birkenstock achieved 23% growth as it continues to take market share.

The qualities of Birkenstock’s brand are finally being noticed by the market. It is currently trading on a 2025 price/earnings (P/E) ratio of 33, according to broker estimates compiled by FactSet.

Investing in a company that has been around for 250 years provides confidence, despite its high valuation. Take advantage of the stock’s drop - due to a secondary stock offering - and buy BIRK shares near the current price of $57.