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Later this week, Birkenstock will be tested through a public issue as the IPO market slowly recovers . Yes, German shoemaker Birkenstock is planning to sell $1.5 billion worth of shares. I think it's important to focus on this because it's not only very big, but also a little different. Look, Birkenstock and its investment bankers are estimating a very aggressive valuation by any standards .
Reuters reported this week that demand for the deal was at the peak of the proposed price range. I was shocked to see that. That's $49 per share , which means its market capitalization is less than $10 billion . Hey, that's more than double the price at which Birkenstock's current private equity owner bought it just two and a half years ago .
Do you think its value has really increased that much ? In short , if you want to buy this share after it goes public, you need to like the company's background . Otherwise, this is not feasible at all. Honestly, it's never a good idea to buy anything immediately after an IPO. I know people do that.
I wish you wouldn't do that. People use market orders. It would be better if they didn't do that. You can usually get a better price if you are a little patient and wait for the price to drop . But, in the case of Birkenstock, it is doubly careful . Other big IPOs this year were launched at deliberately low prices to pique public interest.
That's not the case here. Look, we are making progress . Okay, what's the real story? Everyone knows that Birkenstock has gone from being an old hippie brand to now being a yuppie brand. Their popularity has increased significantly in recent times due to the pandemic. This has impressed a new generation of customers, including my wife.
In fact, it is not possible to say whether this is a permanent or temporary spread. We know that the tastes of young people change rapidly. You know , that's just how they are. Birkenstock is recording some very impressive statistics. Great growth, stable profitability, margins are in the right direction.
See, about a decade ago, the Birkenstock family, which controlled the company from its founding in 1774 until its sale to a private equity firm in 2021, finally brought outsiders into ownership, including current CEO Oliver Reichert . This new team professionalized the business and growth skyrocketed.
In 2021, Birkenstock achieved 32% revenue growth. It was 29% in 2022 , and 21% for the last 9 months ending in June . Now, let 's talk about its private equity owner, L Catterton , which is partly owned by LVMH . That's the French luxury goods giant. Since acquiring Birkenstock in 2021 , L Catterton and LVMH have aggressively promoted the brand, including two collaborations with Christian Dior .
That's another LVMH asset. It worked. From 2020 to 2022, Birkenstock's average selling price experienced 16% annual growth, while average selling prices increased by another 15% in the 9 months ending this June. But there is another aspect to these numbers. While Birkenstock has achieved impressive revenue growth due to higher prices , their unit growth has not been as impressive.
In the 9 months ending this June, it grew by just 5% year-on-year. It's not good to see things like this at a time when the global economy is slowing down. This will make it difficult for them to raise prices in the future, which is something you should be very concerned about . What else? Birkenstock has big expansion plans in Asia, which is currently a very small part of the business.
Asia Pacific, the Middle East and Africa account for only 10% of sales . I really don't know how this is going to go. However, LVMH has had tremendous success in growing its brands in China . Notice the positive aspect of this. Another thing the company has done is increase its profit margins . It's not just through price increases .
They streamlined their list of wholesale partners , increased their direct-to- consumer business to eliminate retail middlemen, and improved the supply chain . As a result, Birkenstock's gross margin has increased from 55% in 2020 to 61% now. Due to both revenue growth and margin expansion, Birkenstock was able to achieve impressive revenue growth from 2020 to 2022 .
I find this a bit worrying, even though their net profit fell 20% year-on-year in the 9 months ending this June. See the advantages and disadvantages. What else do you need to know? Well, since this is a private equity IPO , Birkenstock is selling just under 11 million shares to raise funds . L Catterton is selling 21.5 million shares to make a profit .
Even after the deal, the private equity firm will own 80% of the business . So they will definitely be the main stakeholders . Like many private equity firms , they placed a debt burden on Birkenstock. Some of the proceeds will be used to clean up the balance sheet, but it still won't be that great.
This will have a real impact on future profitability . The fact that most of this float is floating rate debt is not good at all, which is the last thing you want when interest rates are rising. However, I still hope that the Birkenstock IPO will be amazing . Look, it's a popular brand and most of its shares have already been sold .
Remember what I said , it starts at a very high price . In the $ 1.5 billion offer, the Arnault family will buy $325 million worth of stock . They are the main owners of LVMH, very smart people. This is somewhat encouraging as it suggests that the family wants to continue with the business, even though their affiliated private equity firm, El Catterton, is exiting .
This is used as a way to combat the negative aspects I mentioned . Meanwhile, a hedge fund and a Norwegian sovereign wealth fund are buying another $300 million offering . So, 42% of the shares being sold have already been finalized. I think this is one of the reasons why the Brickenstock stock has been booming since the beginning .
I have no reason to doubt the Reuters report that this deal will be priced at a maximum of $49 . Since most of the IPO has already been finalized , it wouldn't be surprising if it was in the late 50s or early 60s , then I would be very cautious. Don't buy it . Don't buy it . Even if we take the price range to $49 , we're talking about a $10 billion market cap for Brickenstock .
If we annualize earnings before interest, taxes, depreciation and amortization for the 9-month period ending in June, that would be an enterprise value of $11 billion ; This year, EBITDA will be 516 million euros, or 542 million dollars . That gives Brickenstock an enterprise multiple of 20.5. This is obtained by dividing the enterprise value by EBITDA , and is used for companies with high debt.
Such a valuation would put Brickenstock near the top of what Wall Street is willing to pay for footwear and apparel companies. There is Apple for comparison. Nike is at 20 . The decor is at 15.5. The crack is at 6 . On this basis, ' on holdings' are more expensive. It has an enterprise multiple of 27.5 because that Swiss running shoe manufacturer is growing very rapidly.
If Wall Street thinks that Brickenstocks are worth more than crocs, then be careful. Again, I would trade at the high of the price range at $41 . If it goes up huge at the beginning, this stock becomes even more expensive, then I don't think we'll buy it. Lastly, Brickenstock has a great product. So much so, that it even appeared in the hugely popular Barbie movie.
But you should be very careful about this stock after its IPO on Wednesday . I'm worried that it will be very expensive at first , and the price will increase further with the initial demand . In short , most IPOs have a rough start, but it almost always results in a loss for those who buy stock with a market order on the open market .
If you can get a piece of the original deal, that's a different matter. But if you are buying in the open market like everyone else , I think you will definitely lose . My advice is to wait for the stock price to drop, because it is likely to drop. Mad Money returns after a hiatus. Then, Kramer will take your calls, and the sky is the limit.
The next fast lightning round is coming. Don't miss a moment in to Kramer with #.
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