Shares of shoe company Birkenstock(NYSE: BIRK) dropped 15.6% during August, according to data provided by S&P Global Market Intelligence. The stock was actually up close to 8% late in the month before shares plunged on Aug. 29. That was the day the company reported financial results for its fiscal third quarter of 2024. As you might have guessed, investors were let down after looking over the numbers.
To be clear, it's not because Birkenstock's numbers were bad. On the contrary, the company set records. The London-based company reports financials in euros. But adjusting to dollars, it generated over $600 million in Q3 revenue and had about $80 million in net profit. Both numbers are strong.
However, there's a difference between good numbers and the numbers investors were expecting, and that's why Birkenstock stock fell. It seems that investors had wanted the shoe company to post better growth and raise its full-year guidance. But that didn't happen, and it led to the disappointment.
What exactly happened with Birkenstock?
Like other shoe companies, Birkenstock sells through retail partners (known as B2B revenue) and sells directly to consumers (known as DTC). Ideally, businesses would grow revenue by selling directly to customers because it would represent a higher sales figure and potentially better profits. But in Q3, Birkenstock's B2B revenue grew far faster than DTC revenue.
Stifel analyst Jim Duffy mentioned this when he lowered his price target for Birkenstock stock from $70 per share to $63 per share. According to The Fly, Duffy noted that higher B2B revenue brings down the top-line number just a hair and affects profitability.
In other words, if Birkenstock's DTC had grown as fast as B2B revenue in Q3, the numbers would have been slightly better. It was these unrealized expectations that caused investors to be disappointed with record numbers.
What should investors do with Birkenstock stock?
Birkenstock stock trades at around 70 times its earnings. That's a lofty valuation for most stocks, and it's especially lofty for a shoe stock. Now, Duffy doesn't think the valuation is too high because Birkenstock is still growing at a double-digit rate. But it's enough to give many investors pause.
I will say this, though: Shoe stocks often trade at cheap valuations because investors don't have great insight into long-term trends. What's fashionable today might not be tomorrow -- it's tough to stay relevant in this space. But Birkenstock is older than the U.S., so I'd say it has staying power.
If Birkenstock can keep growing at a double-digit rate, then perhaps Duffy is right that the valuation isn't too high today. But investors should remember that there are shoe stocks out there with similar growth rates at more attractive valuations. So it may be best to sit on the sidelines with Birkenstock for now.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
