Birkenstock - Not Stepping in - Model Update
All,
Please find our updated analysis on Birkenstock here.
Note: Beta testers can check Birkenstock on the portal here.
The fundamental picture has improved since we last wrote on this name. Birkenstock has refinanced its old SUNs with €900m of 4.500% notes due 2033, and Q3 trading was solid, with revenue up 13% and margins above 30% despite US tariffs. The refinancing more than doubled the bonds outstanding, leaving room for further shareholder returns. With the new bonds trading in line with our fair value, we remain on the sidelines.
Investment Discussion
We are not taking a position in Birkenstock's €900m 4.500% SUNs due 2033. The credit is strong, but at c.95.7 (YTM c.5.3%) the bonds pay too little for the structural risk that comes with them. On fundamentals, an EV of c.€6.2bn covers total debt of c.€1.9bn more than 3x. Even if APAC growth stalled entirely, FY29 EBITDA would be only c.5% lower and net leverage c.0.1x higher, not enough to move the spread to a level that would give us an attractive entry point. With little in the fundamentals likely to move the price either way, the return is essentially the coupon, with no catalyst to re-rate the bonds and a 2029 call that only becomes economic if spreads tighten further.
The main risk to the bonds is capital allocation. The June refinancing raised c.€470m more than was needed to repay the 2029 notes, refinancing a €230m share buyback completed in May that had initially been funded by the RCF. Management has also earmarked up to €500m for either further buybacks or the repayment of other debt, while L Catterton reduces its stake. If that cash goes to shareholders rather than debt reduction, net leverage could rise from 1.8x towards c.2.4x on current EBITDA, although free cash flow would bring it back down over time.
We would revisit at a materially lower price. A sharp US tariff escalation or a large debt-funded shareholder return could push the bonds to levels that compensate for the structural risk while the underlying business remains sound.
Key Conclusions
Valuation: our DCF implies an EV of c.€6.2bn (9.4x FY26 EBITDA) and equity value of c.€5.2bn, close to the market EV of c.€6.5bn. That's a premium to the peer median (8.0x), which we think is justified by margins c.8pp above peers.
Debt capacity: headroom under the 3.50x TRFA covenant is c.€1.4–1.8bn of additional net debt.
Current trading: Q3 FY26 grew 13% (15% in constant currency) with double-digit growth in every region. Tariffs and FX cost c.130bps of margin. FY26 guidance is c.15% constant currency growth and Adjusted EBITDA of at least €710m.
Cash generation: our model shows strong free cash flow despite higher capex, lease growth and tariff-driven working capital. FCF/interest coverage is c.3.7x in FY26 and above 4.0x thereafter. Net leverage falls towards 1.0x, with the additional €500m buyback included.
Downside: in our severe case (revenue −10%, tariffs fully absorbed, higher input and tax costs), FY27 EBITDA falls to c.€500m. Net leverage rises to 2.2x, covenant leverage to 2.0x and coverage to 5.7x. The credit stays comfortably within covenant.
Tariffs: the 15% all-inclusive US rate from July 2026 adds c.100bps of EBITDA margin headwind in FY26, partly offset by price increases and APAC growth.
Legal: the indenture has no debt or restricted payments covenants. The banks are now unsecured and pari passu, and c.€700–800m of priming capacity exists within the Permitted Liens baskets.
Market: strong structural demand, high margins and only moderate price elasticity.
Happy to discuss,
Eashan
E: ekapoor@sarria.co.uk
T: +44 203 744 7055