Why did Birkenstocks IPO get off on the wrong foot?

Sascha: [00:00:02] Welcome to the Dive. The podcast asks who said business news needs to be your business. I'm your host, Sascha Kelly. Last month, Birkenstock appeared and it did not go well. In fact, one headline I read said Birkenstock Stumbles in underwhelming U.S. market debut and Nice. But why? It's a legacy company. It's a fashion icon. And most importantly, it's profitable. It's Wednesday, the 18th of October. And today I want to know why did Birkenstocks’ IPO get off on the wrong foot? To talk about this today, I'm joined by my colleague and the co-founder of Equity Markets. It's Alec Renehan and Alec, welcome to the dive.

Alec: [00:00:43] Sascha, say what you did there. Very, very nice. 

Sascha: [00:00:46] Way to get out of it. So do you own a pair of Birkenstocks? That's obviously going to be the first question. 

Alec: [00:00:52] I do. I own a pair and my partner owns four pairs. So I think most people own a pair of Birkenstocks that. 

Sascha: [00:01:00] You know, I don't. And it's ever since this chat has got out there, I'm like, I've got to go invest in the actual shoe. 

Alec: [00:01:08] As someone who's moved to Coogee about a year ago. I can report from the front lines that Birkenstocks are dominating thongs or flip flops, as they're known overseas in the beach footwear wars of 2023. It's not even close at this point.

Sascha: [00:01:25] Well, I know everyone who owns a pair loves them. So that's basically all I know about the shoe. I have no idea about the back story. Can you fill me in? 

Alec: [00:01:34] Yeah, it's a pretty fascinating company. It's a company that was founded in 1774. Next year, it turns 250 years old.

Sascha: [00:01:42] Really? Old shoes.

Alec: [00:01:43] Yeah. Didn't realise that. Pretty amazing. But let's start at the beginning. Let's start at Wikipedia as all good research projects do. First sentence from Wikipedia. Birkenstocks holding Pale Say is a German shoe manufacturer known for its sandals and other shoes notable for contoured cork Footbeds made with layers of suede and jute which conform to the shape of their wearers fate. But as I said, such a really long history. Founded in Germany in 1774, by 1925, it was sold all over Europe. 1966, they were first brought to America, where they were sold in health food stores. And that really gave them the association with hippies in the 1970s. And that's kind of how I guess I was introduced to Birkenstocks growing up. At least that's how we sort of saw them on TV and stuff like that. But that hippie association really started to drift by the 1990s, where they started to become associated with high fashion. In the 1990, Kate Moss started wearing Birkenstocks, and she made them quite a fashionable item amongst young Gen Xers. 

Sascha: [00:02:56] I think footwear is cool. 

Alec: [00:02:58] And then in the early 2000, it was Gwyneth Paltrow who was wearing them. And this sort of high fashion association has led to a number of brand collaborations with luxury names such as Dior, Manolo Blahnik and Valentino. And we've also seen variants of Birkenstocks from labels like Celine and Givenchy. Apologies if I mispronounce any of those names. It's pretty. 

Sascha: [00:03:22] Close. Givenchy? No, it's pretty close. 

Audio Clip: [00:03:25] Everyone is wearing them again. The cork footbed, the suede upper, the extra round toe. It could only be the Birkenstock Boston. And it's the hottest shoe on the internet right now.

Alec: [00:03:36] Here's a fun fact for you, Sascha. Probably because of the high fashion associations as of 2023, 72% of Birkenstocks’ customers are female.

Sascha: [00:03:47] Wow. That's pretty surprising, actually. 

Alec: [00:03:50] And speaking of fun facts, Steve Jobs, he loved Birkenstocks. Certainly more the hippie association than the high fashion association. But in 2022, a pair of Birkenstocks owned and worn by the Apple co-founder was sold at auction. What do you think they went for? How much do you think someone bid for a pair of Steve Jobs? 

Sascha: [00:04:16] Old shoes are like 50 grand.

Alec: [00:04:20] Come on, Sascha. 

Sascha: [00:04:21] 50 grand? Yeah. That's a lot to spend on a pair of bad old smelly shoes. 

Alec: [00:04:28] Yeah. No. 220,000 USD for a pair of Birkenstocks worn by Steve Jobs in the seventies and the eighties.

Audio Clip: [00:04:37] Birkenstock sandals that graced the feet of late Apple co-founder Steve Jobs. They've just been sold at auction. The buyer, who's undisclosed, paid over $218,000 for the footwear, which auction house Julian says is the highest bid for a pair of sandals. Steve Jobs reportedly wore the sandals during key moments in Apple's history, including when helping found the company in California.

Sascha: [00:05:00] That's too much money to be spending on shoes. 

Alec: [00:05:02] I wonder what you do with them like you do. You frame them and put them on the mantel or do you wear them? 

Sascha: [00:05:07] Exactly. And how do you take care of them? 

Alec: [00:05:09] Conversation for another day. So Birkenstocks in 2021 was then bought by private equity. L Catterton is a private equity firm. It's a firm backed by Bernard. Not for people who aren't familiar with that name. He is the founder of LVMH, the luxury goods giant, the second most valuable company in Europe. And Bernard, at least earlier this year, was the wealthiest man in the world. He overtook Elon Musk. Haven't looked at that leaderboard lately, but he is a billionaire. His private equity firm bought Birkenstocks in a deal that valued the company at about €4 billion. So pretty massive in terms of shoe businesses around the world. And as we close out the history, we can't go past the body bump that Birkenstocks enjoyed this year. Sales have been boosted of late after Birkenstocks appeared in the Barbie movie, which I'm sure most people listening have said.

Sascha: [00:06:09] We had Bobby sports them for a little while. 

Audio Clip: [00:06:12] You can go back to your regular life or you can know the truth about the universe. The choice is now yours. The first one, the halo. You have to want to know.

Sascha: [00:06:21] Okay, do it again. So earlier this year, I guess a year before it turns 250, which seems like a long time to wait, it decides to IPO. 

Alec: [00:06:31] Yeah, that's right. Last month, in September 2023, Birkenstock filed for an initial public offering in the United States. The company listed on the New York Stock Exchange under the stock ticker be i r k. Now, the important thing to note here is that whilst it became a public company, the private equity firm L Catterton continues to be the controlling shareholder with 83% ownership.

Sascha: [00:06:58] Is that usual? 

Alec: [00:06:59] It's not usual, but it is done like it's not completely out of left field, you know, it's a way to provide some liquidity for investors and employees. It's a way for the private equity firm to realise some of the value that they've created, but still to maintain control and decision making authority. And so that's what's happened here. 17% of the shares a publicly traded you and I can buy them, but l Catterton still is the controlling shareholder. Okay. The company went public on the 11th of October. It raised 1.4 billion by selling the you know, that's 17% of its shares and it IPO'd at a value of $8.64 billion. 

Sascha: [00:07:45] 8.64 billion. That is a lot for a company. That's basically cork shares. 

Alec: [00:07:52] Yeah, it is. It is. But it's a pretty big company and it's a profitable company. And excitingly for investors, it is a growing company as well. So from their filings right before they IPO, they reported revenue and profit for the nine months ending June 30 This year, they sold €1.12 billion worth of shares and made a profit of €103 million. And that was up from the prior nine months, like in the year before, where they did €925 million in sales. They actually were more profitable last year though, €129 million. So growing sales are profitable. A few things investors like to say.

Sascha: [00:08:38] So a legacy company, profitable company, household name. But still, IPR did not go very well.

Audio Clip: [00:08:46] Shares of Birkenstock continuing to fall today, just the latest in a series of recent IPOs that have.

Audio Clip: [00:08:51] Struggled Early performance suggests that they've been a bust. Birkenstock ended its first day off by more than 10% from that IPO price, Birkenstock shares ending more than 12% below its IPO price, marking the worst debut by a company worth more than $1 billion in nearly two years. 

Alec: [00:09:09] Birkenstock shares sunk 13% on its first day of trading. And here's a record that they're not going to put up on their mantle. The German company's debut was the worst first day showing for an American listing of $1,000,000,000 or more in over two years. Now, that's according to data from Bloomberg Knock. Right out of more than 300 U.S. IPOs of that size, over $1,000,000,000 in the past century, only 13 have fared worse. The loss of those being Apple Loving Corp. never heard of that. 

Sascha: [00:09:46] They are not a household name.

Alec: [00:09:48] I did look it up because I thought you'd ask. It's like a software development platform for game development. 

Sascha: [00:09:54] Okay, well, sorry for them. 

Alec: [00:09:56] Yeah. So app loving, close 8.5. Percent before its IPO price in April 2021, Birkenstocks fell 13%. Not a great first day. 

Sascha: [00:10:07] Yeah, and I know on a recent episode of Equity Markets you guys were talking about, like, has the IPO window opened recently? Well, we're a couple of weeks away, almost a month on from that convo. I think this is the fourth big IPO of this year in America and none of them have gone well. 

Alec: [00:10:24] Yeah, that's right. So of the four big IPOs that have really been spoken about this year, two are essentially flat and then two are down. So the semiconductor maker aam it IPO'd at $51 it's currently 52 so basically flat. And then Klaviyo the marketing platform IPO at $30 currently 31. So you know kind of let's wait and see what happened. Instacart the grocery delivery app in IPO at $46 it's down to 25 so it's been the worst performer of the bunch. And then Birkenstock as we spoke about it, IPO at a $46 a share price. It's down to $38. So you know not nothing catastrophic really aside from Instacart. But I think it's just going to make companies reconsider whether now is the right time to go public, because there certainly hasn't been a lot of early investor enthusiasm for these big IPOs. 

Sascha: [00:11:26] Yeah, and enthusiasm is key sometimes, isn't it? We're going to take a break, but then when we get back, we'll get to unpack the fact that there's a belief going round that the quality of Birkenstocks is about to get worse. 

Audio Clip: [00:11:45] Gentlemen footwear brand Birkenstock is gearing up for an IPO. The company plans to offer 10.75 million shares, ranging from $44 to $49 a share. This comes after a slew of other companies like ARM and Instacart have recently entered the market. 

Sascha: [00:12:02] Welcome back to the Dive. Today we're talking about the recent Birkenstock IPO. Alec, with all this information, what actually went wrong? Why has their share price dropped? 

Alec: [00:12:12] Yeah, so two big reasons. First of all, the price of the IPO and then secondly, the broader footwear market. Birkenstock originally pushed for a valuation more than six times its 2022 revenue and that multiples six times sales is just not something the market is really willing to pay in 2023. It wasn't a totally unreasonable valuation from Birkenstock. Yeah, back in 2021 companies went public with, you know, higher valuations just in the footwear space. Warby Parker They went public at $4.5 billion, which was more than 11 times the sales. And Allbirds, another shoe company that went public in 2021, it went public at $2.2 billion, which was more than ten times its sales. So Birkenstocks would have looked at that and said 11 times sales, ten times sales. Surely we could get away with six times sales. They couldn't because the market's appetite for valuation has changed massively. Let's look at Warby Parker. It's fallen from $4.5 billion valuation to 1.7 billion. That's a sorry, what? It's lost two thirds of its value. But how about this one? Sascha Allbirds $2.2 billion valuation at its IPO, it's down to $150 million. It's fallen 96% from its highs. 

Sascha: [00:13:42] That's really nasty. So let's look at your second point then, Alec, which is just the general footwear market.

Alec: [00:13:48] Yes. So retailers generally are struggling because consumers are just spending less. Cost of living crisis, higher interest rates. It means more and more of our money is not going to discretionary purchases like shoes and instead is going to fuel and food and rent or mortgages. And so retailers are saying higher levels of inventory as a result. And that means that the whole supply chain is sort of, I guess, backing up a little bit. Suppliers are also dealing with higher inventory levels. It means that we're seeing, you know, more discounting and just yeah, it's a tough time for discretionary retail. Nike, its share price is down 17% year to date. Despite relatively strong earnings. Recently, Adidas has trimmed its profit outlook multiple times in the past 18 months. And Footlocker, the big shoe retailer over in the US, has issued a warning about softer sales. So footwear, it's a tough time in the footwear game. 

Sascha: [00:14:55] Yeah, indeed. So let's pick up that thread that I tossed out there just before the break. And that's the belief that the quality of Birkenstocks is about to get worse. Why? Why do people think that? 

Alec: [00:15:07] Yeah. Now, this is just a theory. At this point, we should be really clear. But we thought it was a theory worth sharing because there's some historical precedent. There's a view generally that companies will list publicly and then face shareholder pressure to bump up the share price to get financial returns and to make their books look really good early in their journey as a public company. And so the view is that companies will start to try and slash costs and increase prices to make their profit look really good. And part of that might often be to release products at lower price points, you know, less quality products at lower price points to try and do sales. It might mean finding cheaper factories or cheaper materials to lower production costs. It just might mean things that dilute the brand. That is the the concern generally when makers of high quality products become public companies. 

Sascha: [00:16:12] And any examples of that happening with any other products? 

Alec: [00:16:16] Yeah, there's a few luxury brands that sort of are the the examples of this coach. The luxury brand really saw its value tumble after it went public in 2000. And I was having a look at its financials earlier in 2012. It made $5 billion. Fast forward two years, its revenue was down to $4 billion. So sales were softening just because, you know, quality and brand perception kind of diminished. The same with Tiffany, the American jeweller. It also saw its revenue start to fall in 2015, even as the broader luxury industry grew. Industry analysts pointed to Tiffany's shift in focus away from the high end jewellery market and towards sort of. More entry level jewellery markets to try and grow its sales with sort of new new customers that they weren't accessing before, but that diluted that brand in the luxury space. So there's a few examples where luxury brands or high quality brands have diluted themselves after going public. But Sascha, I want to put a caveat on this, because that is the theory. But there's one really strong argument against this.

Sascha: [00:17:28] Okay. 

Alec: [00:17:29] There's one person and one company that knows luxury better than anyone else who has made an ungodly fortune from understanding how luxury brands operate. And that is Bernard Arnault and his family, that he you know, he created LVMH, He rolled up all these brands for people unfamiliar. LVMH stands for Louis Vuitton, Moet Hennessy, and they own so many luxury brands. 

Sascha: [00:17:55] I mean, just the names in the title alone. Pretty good start. 

Alec: [00:17:59] Yeah. Yeah. And their private equity firm still owns 83% of Birkenstocks. Yeah, they're pretty long term in their thinking. They understand luxury. They're not in the financial position to chase a quick win. They're, you know, they've. They've got more than enough money to pay their bills. I wouldn't expect them to really dilute the quality of a product and a brand that they own. 

Sascha: [00:18:25] Yeah, I'm with you, Alec. If you're going to back 1% in the luxury market, it's him. Either way, though, I think it's time that I go buy Birkenstocks. 

Alec: [00:18:34] Just in case the quality diminishes. 

Sascha: [00:18:36] Exactly. Exactly. Let's leave it there for today. A quick favour from me. I ask you every episode, but really it does make a difference. Jump on your podcast player. Give us a five star review. Right. Some nice words, that's all to say. It just helps us get in front of you. Alec, thanks so much for joining me today on the dive. 

Alec: [00:18:54] Thanks, Sascha. 

Sascha: [00:18:55] I'll be back in your feeds on Friday. Until then.