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Running in Birkenstocks

Birkenstock $BIRK is a high-quality IPO in terms of company, but the stock remains vulnerable to the prior periods of growth being unsustainable in 2024.

Sometimes ugly gets a moment.

These shoes have always been ugly but have a fierce following of customers who prefer comfort and appreciate the "style" of the brand. Comfort has been a durable trend since lululemon $LULU made all-day yoga clothing mainstream.

Crocs $CROX blazed the ugly, comfortable shoe trail and continues to convert haters like Helen Mirren into customers. Few thought that Crocs would become a "real company" with over $4B in sales and 27% EBITDA margins.

The COVID shock helped usher in a collapse of traditional footwear. Once consumers switch to comfortable shoes, it is very hard to return to traditional shoes. Many of my female friends lament their very expensive inventory of beautiful high-heeled shoes that they will rarely, if ever, wear again. The rising casual tide also helped brands like Sketchers $SKX and Ugg $DECK.

Birkenstock $BIRK was an IPO that came with high expectations, and many figured it would price above the $44-49 range and trade up from there even though they agreed it was overvalued at that price. IPO hype often works.

The bankers and the company management may have taken the market for granted and not invested enough into building a strong story around positioning. They also attracted some negative attention by suggesting they were somehow doing the world a great favor by offering stock to the public. The stock market is not a socialist vehicle.

During the marketing phase, investors became more distracted and concerned with the consumer spending environment which was capped off by poor results from LVMH. Maybe the Birkenstock deal team should have laced up some On running shoes $ONON and completed the IPO last week!

Two things happened last year that may not carry into 2024. The show became fashionable and "on trend" at the same time, and luxury spending was robust.

Recent data has suggested that consumer spending in the upper segments may not be as sustainable as previously thought. Much of it is tied to the continued impact of higher interest rates, which take time to flow through the system. Other factors like the massive ERC program exploitation, led to the unexpected federal stimulus of ~$300B. Although we don't have "proof" about the ERC program the fact that the US government suspended the program and a number of companies plying the trade of getting people questionable ERC payments were closed or massively reduced in scale.

My own estimate is that $BIRK enjoyed about $200M of excess revenue in the past 12-18 months that is unlikely to recur in 2024.

Birkenstock is an outstanding company, but the question now is how to evaluate $BIRK stock here at $40.

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