One of the byproducts of the COVID-19 pandemic is that work-from-home employment structures became more normalized. As a result, people have transformed parts of their homes to mimic more of an office-like environment. This trend led to a surge in e-commerce activity as consumers worldwide were making out-of-the ordinary big-ticket purchases.
Yet another area that seems to have experienced a boom as a result of the pandemic is casual apparel. In particular, consumers have taken a liking to more comfortable, less stylish footwear. One shoe company that has benefited is Crocs -- most famous for its rubber clogs that can be worn both indoors and outdoors. Since March 2020, shares of Crocs are up 432%.
While Crocs has made many investors a pretty penny, it's not the only footwear brand that has seen an uptick in popularity. One stock that I have my eye on right now is Birkenstock(NYSE: BIRK), and I'm not the only one. UBS analyst Jay Sole recently upgraded his price target on Birkenstock to $85 -- implying roughly 55% upside as of market close on July 12.
Let's dig into Birkenstock and assess if the company's products are just a niche consumer preference, or if the business has compelling upside potential.
An overnight success that took 250 years
Crocs was founded a little more than two decades ago. Over the years, the company has demonstrated that its products can generate demand and remain relevant. This is a testament to leadership, product quality, and consumer preferences -- three very hard things to achieve in any industry, let alone the fast-changing fashion realm.
With that said, I personally see Crocs as a niche product that mostly appeals to millennial and Gen Z consumers. As a millennial myself, I'll admit that I own a pair. However, I only wear them at the home office or when I'm lounging. Moreover, despite the company's long list of cool designs and collaborations with other brands, I don't see the need to purchase another pair.
On the flip side, Birkenstock has a much deeper product selection that I think appeals to a broader demographic base. While the company is best known for its sandals, Birkenstock also boasts a line of lace-up sneakers, boots, clogs, and accessories like socks.
Birkenstock did not become a full-spectrum footwear brand overnight. The company was founded in Germany in 1774 -- exactly 250 years ago. Although Crocs has built a respectable business, I see Birkenstock as a stronger candidate. Having been around for 250 years and managed to expand globally, Birkenstock is truly in a class of its own.
Image source: Getty Images.
Birkenstock's business results are strong
Back in May, Birkenstock reported earnings for its second quarter of fiscal 2024. For its second fiscal quarter (ended March 31), the company reported revenue of 481 million euros -- an increase of 23% year over year on a constant currency basis.
What I found particularly impressive was that Birkenstock's sales grew by double-digit percentage points across each geographic region. While sales rose 21% in both the Americas and Europe, the company is witnessing particularly strong demand in Asia -- which generated 42% revenue growth year over year.
One slight blemish in Birkenstock's financials was gross margin. During the second fiscal quarter, the company's gross margin dropped by 320 basis points to 56.3%. I don't necessarily see this trend as a problem, though.
While some of this margin deterioration was to be expected due to planned production expansions, keep in mind that abnormally high inflation has been an issue for the macroeconomic environment for a couple of years now. This has impacted both labor costs and consumer discretionary spending habits.
Nevertheless, Birkenstock is still generating robust revenue across major geographies and product categories despite a tough macro picture. I think this speaks volumes to the company's reputation, as management has demonstrated its ability to navigate a murky economic situation and appeal to consumers regardless.
Moreover, revenue accelerated at a much faster pace than the company's expense profile, hence net profit and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were both up in the second quarter. Given its impressive quarter, management raised its 2024 revenue and EBITDA guidance.
Is now a good time to buy shares in Birkenstock?
The chart below benchmarks Birkenstock against a peer set of other footwear stocks on a price-to-earnings (P/E) basis. At a P/E of 97.3, Birkenstock is a bit pricey -- even for a growth stock.
BIRK PE Ratio data by YCharts
Despite its valuation premium, I think an investment in Birkenstock is still compelling. The company's differentiated product line and its strong unit economics make Birkenstock stand out in a hyper-intense footwear industry.
Considering management revised its financial guidance upward, there is a case to be made that the stock could witness an uptick should the company execute or overperform on its forecast. Given Sole's significant price target increase, I don't think Wall Street sees the upward revisions as already baked into the stock.
Lastly, while the P/E is notably higher than those of other footwear peers, it has normalized a bit since the beginning of the year. I think investors looking for some growth in their portfolio should take a look at Birkenstock and consider scooping up some shares.
With such a long, rich history combined with the company's ability to appeal to customers around the globe, I think Birkenstock is in a really unique position among footwear brands.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Skechers U.s.a. The Motley Fool recommends Crocs and On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
