Birkenstock - Steps - Model Update
All,
Please see our updated analysis here.
Birkenstock weathered the tariffs in FYE 2025, but 2026 will be tougher on margins; that said, the company continues to grow sales and profitability and is increasing its retail store portfolio. The debt is well covered by the enterprise value, although this is reflected in where the SUNs trade.
Investment Discussion:
- With a YTW under 6%, the Birkenstock SUNs do not offer enough yield to grab our attention. The bonds are callable at 101.3 from the end of April 2026, so any upside from the current 101 price is capped. If there is a significant reversal in the global economy, we could see 3 points of downside, but we think this is not likely at the current time. For now, we are not taking a position. Several clients have enquired about the name, so we have looked at the business
- Birkenstock manufactures in Germany, but around half of its sales are in the Americas. If the US imposes significant trade tariffs, sales would be hurt, and the SUNs would widen to more interesting levels. We will revisit once we know what levels of tariffs the US is proposing, and whether there will be specific tariffs targeting or exempting Birkenstock.
- The equity cushion beneath the bonds is >€4bn, even with significant tariffs, the SUNs are safe.
- Given the cash flow generation and the low leverage, we would expect LVMH to look to replace some of the equity with debt over time. The company is investing in upgrading its manufacturing capacity, so we do not expect any imminent action.
Key Conclusions:
- Our DCF model shows €3.8bn of EV giving €3.1bn of equity value. The gap to the €7.7bn public market EV reflects the high premium for what is considered a top brand. We see additional debt capacity of €1.5bn, and we expect the company to begin buybacks at some point in the future.
- Our current trading section highlights the currency headwinds likely in H1 26, whilst topline will benefit from greater capacity, Birkenstock will continue to absorb some of the tariffs, which will weigh on FYE 2026 margins (both gross and EBITDA).
- Our Model shows significant free cash flow generation over the next few years despite higher capex and working capital outflows for the retail operations. FCF/Interest coverage is forecast at >3.0 in 2025/26 and >4.0 in subsequent years. Leverage will fall toward 1.0x, but we expect some cash to be diverted to stock buybacks (once the company gives more clarity here, we will build it into our model)
- Tariffs will have a bigger impact in FYE2026, stock build-up in the US in the first quarter of 2025, moderated the impact to 135bp on Gross Margin (€35m). The impact on EBITDA in 2026 will be around €70m according to our estimates.
- Birkenstock’s market has strong structural demand, high margins and only moderate price elasticity.
Model
- Birkenstock will generate significant free cash flow over the next few years, even with higher capex and working capital.
- We expect FCF/Interest coverage to be at least 3.0x this year, rising back above 4.0x in subsequent years.
- We expect that Birkenstock will initiate a share buyback program as a use of FCF. We have not modelled this yet as there has been no announcement. However, we would expect around €200m per annum, given our estimates of Free Cash Flow
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055