Birkenstock’s (NYSE:BIRK) Q3 2024 was great, with the company growing impressively behind challenging figures for most peers. Despite this, the stock price collapsed because of a revenue and earnings miss.

Like Abercrombie & Fitch (ANF) this earnings season, the BIRK price collapse is a warning against buying a growing business at high valuations. Even when things work great, the stock may collapse.

Apart from that price event, the result and the call did not provide much new information. However, with a stock price that is now almost 20% lower than when I first reviewed it, I think we can revisit the valuation. My conclusion remains that Birkenstock’s price is too high, requiring excessive growth to make sense. This is inherently risky, but much more so now that the brand has absorbed so much fashion risk. For that reason, I maintain my Hold rating.

Great quarter

All cylinders firing: Birkenstock’s revenues grew 19% YoY in 3Q24, slightly below the 20% growth for 1H24. This growth was broad-based, with wholesale up 23%, DTC up 14%, Americas up 15%, Europe up 19%, and APMA up 41%. Again, the figures are great but a little below the same figures for 1H24, showing some deceleration in growth, but this type of growth in the current context is still massive.

Move to B2B and margin impact: DTC lost share this quarter, impacting the company’s gross margins a little, although it improved at the EBITDA margin level. Management commented that a trend toward physical shopping caused the move. As Birkenstock’s physical footprint is super small (less than 70 stores), a move to physical implies a move to the B2B channel. Some analysts and investors may have seen the slower DTC with caution as an earlier sign of Birkenstock’s demand decelerating further. The company’s webstore traffic is indeed flat since the beginning of the year. However, the impact of the brand on Google Trends continues to grow strongly. I side with management in this debate and see the change only as a quarterly variation, not indicative of any underlying trend.

Guidance maintained: With nine months in the bag and the majority of the key month of July already completed by the time of the call, management confirmed its guidance of 20% topline growth and adjusted EBITDA margins of about 30% for the year.

Paying down debt: With factory expansion CAPEX now behind, the company is expecting to continue paying down debt, with the goal of eventually not having any debt. We will probably see a significant payment of working capital facilities at the end of 4Q24, as Birkenstock collect cash from the receivables and inventory buildup into the important summer quarter.

Terrible price action

If a Martian was looking at Birkenstock’s results and resulting stock price action, he would be scratching his head. The company confirmed 20% growth guidance and is growing 40% in the most populated region in the world, and yet, the stock price lost 20% of its price in the ensuing week.

There are many explanations as to why the stock price behaved like it did: that the company missed revenue guidance (by $30 million or 5%), that revenue is decelerating sequentially, and that DTC growth is indicative of further deceleration ahead. These are all valid reasons. However, the company has, since its IPO, guided for mid-double digit growth over time, so the markets should have known about a potential deceleration from 20%+ figures.

In my opinion, the reason is much less rational. Expectations for Birkenstock were high. The stock had climbed almost 100% since its post-IPO low price. This means a lot of people were uneasy with holding the stock. The smallest sneeze in operations could lead to a stock price decrease, and so the earnings miss caused a small panic. This is what happens with ultra-high multiple stocks (look at ANF or NVDA for other recent examples of incredible results and terrible price performance).

Valuation still super optimistic

Now that Birkenstock is down 20% from one week ago, and close to 20% since my previous article, we can revisit the valuation to see if the stock is more fairly valued now.

Thesis review: As a reminder, my thesis on Birkenstock is that the company has a great product, that commands a lot of loyalty from a set of core customers. However, a big part of its recent growth comes not from that core customer cohort expanding, but rather from more fashion-oriented customers buying into the brand because it is trendy now. This type of growth comes both from new customers and from customers buying up into more expensive fashionable offers, driving up ASPs (like the 1774 model retailing for EUR 390 as an extreme example). This type of growth makes future growth more challenging because it now has a lot of fashion risk. At the same time, the stock price reflects recent growth and requires a lot of future growth to make sense, thanks to a nosebleed earnings multiple.

The situation now: Birkenstock’s situation has not changed meaningfully this quarter. Revenue is indeed decelerating a little, but this is normal for a growing company. This is not necessarily indicative of a reversal in the fashion cycle yet.

The only change has been the stock price and its multiple over current and future earnings. Today, Birkenstock has a market cap of $9.4 billion, and is guiding for adjusted EBITDA of EUR 532 million for the year, or adjusted net income of about EUR 200 million, or $224 million (removing EUR 100 million in D&A, EUR 120 million in finance costs, and 35% income taxes). This implies a current earnings yield of 2.3% (or a P/E multiple of 40x).

On top of this earnings yield, we receive BIRK’s growth yield. At its current rate of growth, that implies a healthy 20% yield, but the question is what will happen in the future. For example, in my opinion, a fair return for a stock of Birkenstock’s quality would be at least 12% over time. This requires 10% growth into the future, something that is much harder to sustain for a footwear brand.

The above return is based on holding the stock and not selling it, receiving return from dividends and buybacks. It is a model of the return to be received over more than a decade of holding the stock. If we think about shorter time periods, we need to consider the effect of the stock sale and its multiple in the future. If Birkenstock’s multiple decreases to 20x, which is still high for its peers, then the stock should grow even more to generate a sufficient return for the investor.

In my opinion, Birkenstock’s growth ahead is very uncertain, given the high fashion risk the brand now commands. Further, even if I was more confident about growth, the current stock price has growth as a requirement, not an opportunity. Without growth, the stock does not generate even a fair return. For that reason, I believe the stock is still a Hold at these prices.