Birkenstock Holding plc (BIRK) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our final fireside chat session of the 31st Annual Goldman Sachs Global Retailing Conference. My name is Brooke Roach. I cover the U.S. apparel accessories and branded discretionary goods sector here at Goldman. And it is my pleasure to moderate and host our next session with BIRKENSTOCK. Here with me today is David Kahan, President of the Americas region. Welcome, David.

Thank you. Good to be here, Brooke. Thank you.

Maybe we could kick things off with a discussion of your recent earnings announcement, which was just last week. You delivered very good growth in the U.S., driven by a strong performance in B2B. Can you talk about BIRKENSTOCK's consumer positioning and where you're taking market share today?

So we had phenomenal growth globally, not just in the U.S. We had our largest quarter in company history. We were up 19%. We grew in every geography, every region, every segment by double digits. So we're very proud of that. Our brand positioning has not changed from the very beginning. This is a 250-year-old purpose-driven brand. It's all about -- oh, geez, so I just carry this wherever I go, but it's all about this. This is the footbed. We're not in the footwear business. We're in the footbed business. What we're trying to do, the benefit of this is bringing this product to everyone for just the benefit of the product and their ability to experience it. And we're finding for all the growth that we've had, there's a lot of consumers that are relatively new to the brand. The average consumer, at least in the U.S., we've documented owns 3.8 pairs of BIRKENSTOCK at any given time. I think you probably own more than that. We're happy. You're not wearing them today, you should be.

I've already apologized.

But when you have a brand that's this sticky with consumers, it's the lifetime value. So it may change where they purchase it and what products they're purchasing. But ultimately, once somebody experiences the benefits of the footbed, like our CEO, Oliver Reichert likes to say, "People buy our product for 1,000 wrong reasons. But once they buy it and they're in it, that's where the journey really begins."

That's really helpful color. As we stick with U.S. performance and some of the recent trends, and given your industry experience, how would you describe the consumer behavior in the U.S. today? What surprised you most so far in 2024?

Yes, I think a couple of things. everybody says the same thing. The American consumer is challenged, but they're resilient. And the truth of the matter is the biggest shift in consumer behavior is, general shopping is slow. Intentional purchasing, meaning people seeking the purchases that they really desire has never been stronger. And if you're a brand like BIRKENSTOCK, you are one of those products that people really, really demand. So the biggest difference I would say is everybody shops through a funnel. If you're a billionaire, this is your funnel. If you're a millionaire, this is your funnel. If you're the average American family, this is your funnel. And those things that are in the funnel, in your demand, those are the things that you desire. I mean I used the example, but Taylor Swift sells out 50,000 people at Gillette Stadium, they're not all worth $10 million buying tickets. That's really important to that consumer. They find a way to purchase that. And BIRKENSTOCK is very important to our consumers. So the intentional purchasing of our brand, and it's actually counterintuitive because our products, our leather products are growing at twice the rate of our lower-priced products. So we prepared for 2024, actually expecting the consumer to trade down to some degree, and we're seeing the complete opposite. We're seeing the consumer trade up with us. We're seeing a little bit of a channel shift recently. We're certainly seeing a return to physical retail. This has become way more apparent just over the last couple of months. It probably started right around Easter. We started to feel that it's become a bit more prevalent. People just want to be out, they're shopping more and that's a beautiful opportunity for us because we have a very tactile product. We love people to feel the benefits of our product. That's why we have retail stores. only have 60 some odd retail stores around the world, and we're opening more. We've already shared plans to have 150 stores. We just opened in Le Marais in Paris. We just opened in Austin, Texas. There's plans for more but I think that helps mitigate some of the shift to physical retail. And if you look at the results of our retail partners, they're seeing right now, at least with our brand, 3x the growth in physical stores than they're having online.

Very interesting. I'm curious, as you dive deeper into the U.S. consumer, are you seeing any additional price sensitivity across your consumers? Maybe said another way, how are volume and ASP trends faring in the U.S.?

ASP is up in every channel, not just in the U.S. but globally. And I think it's interesting. I would say, our fastest-growing consumer our consumers that, number one, tends to be sports-related, lifestyle, health and wellness. And secondly, there's this whole emerging, I call it emerging youth consumer. For them, they're new to the brand. BIRKENSTOCK is a bit of an investment product for them. In most of their closets We may be the most expensive brand that they have. If they have a pair of Nikes and a pair of Vans and a pair of Crocs and blah, blah, blah, BIRKENSTOCK is a new addition. We consider ourselves the wardrobe completer. If you look at what's happening in this demographic, BIRKENSTOCK is now part of their wardrobe. BIRKENSTOCK is part of their consideration matrix and they're new to the brand. I hear it all the time, like parents will say, "My kid said to me, I got to have this new brand called BIRKENSTOCK. They're like, new? I wore it in when I was in college. Like, new? It's 250 years old." But the beauty of it is, once they come to our brand, they are our consumers for life. And our membership on our own website grew by 30% in the last quarter. Our members tend to be incredibly engaged. They spend 25% more average order value. They have 50% higher click-through. So the migration of consumers wherever they come to this brand in the near term leads to the long-term value and the opportunities. As we open more stores, as we expand into white space categories and white space regions around the world, it's just greater reach for this brand.

There's been a lot of discussion about the consumer and what they're looking for from a value perspective. You talked a little bit about the funnel and the considerations that you said that you're seeing some trade up. But do you think that the consumer looking for value is cyclical or structural? Is it a function of the macro? And how are you navigating that? It does appear that the brands that are outperforming or taking share on this?

Yes. It's interesting. I think value is all relative. And I think if you look at the results of retailers, you're seeing that the value channel is outpacing call it, the full price channel. The difference is brands that have the highest relevance -- what's relevancy in the brand? It's people demanding it and people demanding it at full price. The beauty of BIRKENSTOCK is globally, we hold 90% of our retail sell-throughs at full price. In the U.S., where we obviously have a MAP price market, our full price realization is over 95%. There's nobody in our space that can say that. So if you're a retailer right now, your go-in margin is basically your maintain margin. And I think as long as you control what I would call relative scarcity in the market, not the relative scarcity of a Birkin bag, but the relative scarcity of a BIRKENSTOCK, which means you have an urgency to buy when you find your size, when you find your style, you buy that product. Nobody is buying the product and price comparing, can I get it cheaper someplace else. Nobody like you had mentioned to me your favorite pair of BIRKENSTOCKs that you got, this shiny BIRKENSTOCK. When you got -- when you saw them, had you said, "I'm going to wait 3 weeks and maybe come back," it may not be there. And that's the beauty of this business model is that we have a broad enough collection so that we have core styles where you would hope to get your size 7 days a week, 365 days a year, but there are limited styles. Some of them are available only on our own website. Some of them are only website and stores, some of them at select retail partners. So you're constantly calibrating the assortment and the availability of the assortment. So there's always the sense of urgency in the market. And I think consumers respect that. I think right now, people are responding to not just the brands, but the brands that are holding their full equity. And at a time when you would say the U.S. consumer is very challenged and is a value consumer, why is it that the brands that are growing share, and I can name them on one hand, are those brands that have full price equity? It's kind of counterintuitive to a challenged consumer. But it plays to exactly what we said, the consumer is very intentional. The things that are really important to them -- if taking your family on vacation was very important this summer, it doesn't matter how challenged you were. One family might have gone to Disneyland, one might have gone to Six Flags, great adventure. It's all relative. But when you are one of those products that is in that space of just a brand that's in that, you just don't compromise that.

We have seen some increases in promotionality in some of the broader market. We're asking every company their expectations for promotionality this holiday relative to last year for both yourself and the industry. I'm curious to hear your thoughts on your positioning in the footwear market.

For us, we're a full-priced brand. So we don't participate in any coupons, any friends and family, any -- by and large, were excluded. Having said that, I think the general marketplace will be pretty challenged from a promotional standpoint, but that's not a bad thing for BIRKENSTOCK. I've always said the more somebody can save money on something else, the more available money they have for BIRKENSTOCK. It just seems logical.

Makes a lot of sense. Excellent. Let's go to your channel business. How did you describe the confidence in market tone across your wholesale accounts that you deal with? And how would you compare this to 3 or 6 months ago?

Yes. BIRKENSTOCK, around the world right now, is a must-have brand for any retailer who's in this space. And what that means is we're super, super important to their consumers. So whereas a couple of years ago, you might have seen a BIRKENSTOCK assortment that was by and large sandal based. Right now, our assortments, if you're shopping us out at wholesale are sandals, clogs, close-toe shoes so the breadth of the assortment is growing dramatically. Having said that, because most of our wholesale partners are relatively challenged in their top line, it's a flat market. If you're up 1%, you're considered doing okay. When you have a brand that has sell-throughs year-on-year that might be trending 20%, 25% ahead, you want to invest more in that brand and you want to market even more with that brand. That's where we decide it's less about what channel do you lean into and it's more about leaning into the consumer. And if there's one thing that we did over the last 6 months, most critically the last 3 months, we wanted to lean into the consumer on where they're shopping for our products, where are they going to intersect with our brand. It might be my own website, it might be a valued retail partner. But wherever they come to contact with the brand, making that purchase, puts that footbed on their feet and a pair of shoes in their closet and considering the lifetime value of that consumer, that's very important to us.

Where do you see the biggest opportunity for expansion of your wholesale network?

Beyond wholesale, there's opportunities for us, first off, geographically. APMA is a huge opportunity. Our partners in Europe just finished the 2-year cleansing of the market that right now is really benefiting itself. And you're seeing BIRKENSTOCK show up incredibly strong in all the best retail partners and a very strong D2C business. The biggest opportunity for us in our wholesale network is in the doors we're in right now. Over this past quarter, 90% of our revenue growth came from existing doors. So it's not as if we're opening new distribution. We're growing the breadth of our assortment in these stores. So again, you go from 1 sandal to 10 sandals to 1 clog to 3 clogs to a closed-toe shoe to a full assortment. Then you have white space categories that we've spoken about since we started the IPO process. Aside from closed-toe shoes, there's the professional category, health care, culinary, we make the absolute best product on the face of the earth for people who work in the health care industry, bar none. The fact that we haven't had the bandwidth to bring this product to the market to a fast-growing demographic, if you're getting out of college right now and you want to guarantee yourself a job, go into the health care industry and be a nurse. It's just phenomenal. So right now, you have all of these people that could benefit from our products that we haven't quite penetrated yet. So it's white space regions, it's white space categories. The benefit of our footbed as a stand-alone product, there are people in the United States and Canada who -- there are companies that do over $100 million, and I don't mean drug store brands in quality footbeds. We are now expanding our distribution into mainly sports-specific operate sport markets where BIRKENSTOCK shows up, not as a recovery product after sport but also as a footbed to put in your shoe. I'll give you an example. We now are starting to do expanded distribution in running specialty stores. If you're running specialty store and you're going in there and you're buying your Brooks Glycerin to run in, after your 5K run, putting on a pair of BIRKENSTOCK helps you recover and will help you perform better. Professional athletes have known this forever. The world's greatest ultramarathon or Scott Jurek is the guy who swears by them. You'll see the Steph Curry's of the world that are paid by another brand to wear their product on the court wearing BIRKENSTOCK off the court. So bringing that to the places where that consumer is going to intersect with the brand, are really, really important for us. And by the way, for the retailers, if you're going into a running specialty store, odds are you're buying one running shoe. It might be Brand X or Brand Y, but you're not walking out with an Asics and a Brooks. It just doesn't happen. The incremental sale is the pair of BIRKENSTOCK. So that's very important to them. We just started distributing our product, believe it or not, in green grass golf shops. And if you don't know what green grass means, it means country club golf shops. It's not mass market golf so Bandon Dunes-like, world-class golf resort. We have somebody who's doing this right now. If you walk 18 holes, you're walking 5.2 miles in a pair of shoes that's not really made for walking. Putting a BIRKENSTOCK footbed in your golf shoe is the best thing you can do for the sports. So we just started distribution there and the initial reads on it are absolutely spectacular. So every time you look at a white space or a little corner of the industry that the consumer could benefit from the premise. And I keep coming back to every single thing we do. Every single thing we do is tied to our purpose. We're a purpose-driven brand. It's about the footbed. It's about different use occasions for the footbed. And the more we do this, if you're a BIRKENSTOCK consumer and now we make an offload BIRKENSTOCK. So when you go hiking or hunting or fishing and you're making camp for the night and you can take off your boots and put on an off-road BIRKENSTOCK, that's another use. If you're at home and you wear a pair of oars or mat slippers, it's a different use. If you go into the office and they don't allow sandals in the office, maybe, or you go into a steakhouse that they don't allow sandals, Mastro's doesn't allow sandals, you have a closed-toe shoe. I mean I'm wearing the Ben sneaker, I can't -- I mean, there have been a handful of people today who have come to meet with us wearing them. You're talking about -- this is not to be hyperbolic, but this is the holy grail. It's the feel of the BIRKENSTOCK sandal in a closed-toe product. And still, our closed-toe products are over 30% of our mix right now but actual shoes, not clogs is still single-digit penetration. So when you look at the marketplace and you look at how big it is and you look at -- geez, if I can get 1% share here, 2% share, you start to add it up. This is significant growth and its growth in line with everything we said we were going to do when we went through the whole public process. Nothing has changed.

As you think about how loyal your customer is and as you expand into these new product categories, are you seeing that loyal customer drive higher frequency by picking up new product categories? Or is this more a function of new customer acquisitions?

I think it's a little bit of both. It's interesting, on our own website, of the people who bought the Ben closed toe are current members. So that shows that once you're in BIRKENSTOCK, your proclivity to purchase our closed-toe shoe is even higher. Do I think that first-time purchases might be more likely to buy one of my Ben sneakers in my Arizona sandal? Probably not. I think that would be a bit presumptuous. So I think we're getting people into our product by way of our iconic styles that, by the way, closed-toe shoes are growing at twice the rate of our other sandals, but our core classics are still growing at double digits. So every region, every geography, every category in every segment growing at double digits tells you that people are coming to the brand from different sides. But I would say once somebody is in the product, whether it's the Arizona sandal or the Boston or any of our iconic styles, they would have a higher propensity once they've experienced the footbed to buy more products in the footbed for different use occasions. And just remember also, there are some athletic brands that you could be a size 9 in a running shoe and a size 10 in a basketball shoe or you bought a running shoe once and it's a size 9 and the next purchase it's a 9.5. The beauty of BIRKENSTOCK is once you have your size, that's your size. So you can order online and be assured that for the most part, every product you buy, our return rate on our own website is half the return rate of the average footwear multi-brand retailers. So that tells you that there's a lot of loyalty, a lot of repeat purchases. And that once people know their product and know their size, it's very easy to repeat the purchase.

Let's shift to your U.S. D2C channel, where last quarter, you saw a deceleration in growth, particularly in the U.S., what's happening in the consumer journey and channel preference there?

Yes, I think -- and I'll talk for a minute about this. I think it's more pronounced in the U.S. than it is anywhere globally for the brand, and that's mainly because we're just more developed here. our percentage of direct-to-consumer in the U.S. with the brand is already at 42%. And since we don't have many retail stores, physical stores, that's largely digital. So if you equate it and you would say to yourself, okay, on a by pair basis, if I saw 100 people walking down the street, 25 of them bought those shoes directly from me on my website. 25 our of 100, when we distribute it, in the most important retailers with the biggest reach with databases of 30 million people with 6,600 points of distribution I would say that's a pretty good balance. I think what happened over the last quarter is there is definitely somewhat of a return to physical retail. I also think that the younger demographic that's embracing this brand is returning to physical retail. I'll use the example, I told a couple of groups earlier -- but let's get into the consumer's head. If you're a 21-year-old kid -- and I'm using the word kid. Three years ago, you spent a year of your life and your parent's basement going to Zoom school. Odds are right now on the weekends, you and your buddies are not sitting in somebody's basement, just searching and Googling and shopping. You're out at physical retail and you're shopping. You're finding brands, you're out there, you're seeing what's validated in multi-brand environments. I used the example, but Abercrombie & Fitch is probably the best-performing apparel retailer right now. That consumer has just discovered, rediscovered that brand because they're out there and they're seeing it. That consumer also likes to see things validated in a multi-brand environment. So we made a decision that if that consumer was starting to really come to the brand, and we will always outstripping the demand because of our engineered distribution, which means we're constantly changing the dials and touching the levers on how much product we put in what channel of distribution, in what account, in what door, we decided as we saw some of this moderation in the traffic and some of the shift that we would capture more of that, the sell-through results have reflected that very, very strongly. While we say that, our stock-to-sales ratios are still outrageously successful. So we're not upside down in stock-to-sales ratios by a long shot. We're still managing relative scarcity and relative scarcity is just what that means. It's relative. There's scarcity and then there's drought. Drought is a little bit dangerous. Relative scarcity just means that you're fulfilling more of the demand. And the biggest takeaway that I have from this is people think that demand is a static number. It's not. It hasn't proven -- if demand was a static number, I would have hit my number 5 years ago. We have a brand flywheel. This is a footbed flywheel. The more you put into the market, the higher the demand goes. The more you put in, the higher the demand. The more I get somebody in the BIRKENSTOCK Arizona or Boston today, the better my chances are that, that consumer that may have come to the brand today in a wholesale partner and is happy with their purchase now is part of my brand family, now shares what we know about the footbed and may be more apt to buy a Ben or another product that we start introducing for more use occasions. So I think it's -- I think we tend to think of the consumer very one-dimensional when it's really 3-dimensional. I don't think you're an online shopper or a physical shopper. The word omni retail means omni retail. You may shop one way on Saturday and one way on Sunday. You may shop different ways in one day. All we did was in the moment really look at what was happening in the marketplace and try to make some very smart decisions. And ultimately, we sold more pairs than we may have expected otherwise. But because we have a business model where ultimately, if gross margin is just a waste station on the way to actual profit generation, there's a difference at the gross margin line. At the EBITDA line, because our margins are relatively similar between wholesale and D2C, making this decision actually means that you're just selling a few more units to generate the same EBITDA dollars, profit dollars at the end of the day. And if ultimately, if you sold a few more pairs, that's not the worst thing. I think about it and I go, if I just drop my kid off at Utah State University, Go Aggies, and instead of 2 kids wearing BIRKENSTOCK, there's 4. To me, that's not a bad thing.

There you go. Excellent. You mentioned margin -- you mentioned some margin mix items there. Wondering if we could speak a little bit about the U.S. division. How should we be thinking about the U.S. margin outlook? Do you see any margin impacts from shifts in channel mix or product category?

Not necessarily. And I think we really don't look at the U.S. specifically more so than we look at the whole total aggregate of it. And it's a mix of price, it's a mix of category and it's a mix of channel. We've always said it's kind of like 30-30-30 kind of thing that makes it up. We do take very surgical price increases. We've had no resistance to raising our prices, but we do it on a very surgical level. Obviously, if I had one pair of shoes in my bag and I can only sell one, I would love to sell that D2C via my own website. At the end of the day, I'd like to. Does the consumer ultimately want at that moment to purchase that shoe there? They might, at some point, they might have yesterday, they may not tomorrow. They may come back the next day. So I think it's all relative. I think it's really all relative. What we can say is the focus on more premium products is definitely happening. Our higher-priced products, meaning leather, are growing at twice the rate. In our own retail stores in the U.S. Our premium products are now the fastest-growing category that we have. We opened a store in the Miami Design District, which just happens to be surrounded by probably the best luxury stores on the face of the earth. 9% of our business in that store is our 1774 premium, which is a very small percentage of our business, 9% of it. That just goes to show if the consumer is there for these products it's all about -- you used the word value. Value can be $160 clog. Value can be whatever else. So I think it's a mix. I see the consumer trading up with us. I don't see any price and I'll also say our white space categories tend to be a higher ASP categories like closed-toe shoes.

That's really helpful. As we think -- one question we're asking all companies is how they're thinking about the outlook for cost into next year. Do you think current cost pressures that you may be seeing in the environment today in relation to your U.S. business and your Americas business will be the same, better or worse into 2025?

There might be some puts and takes on everything. I think we do have and obviously, we've invested in our manufacturing capabilities. So you're seeing that in our business this year. That will earn itself back over the next year. But controlling our own destiny to a large degree in our own vertical manufacturing, I think, helps us stabilize that. We've been able to pass along just normal inflationary things. Are there bogeys out there like a new president issues some tariffs to who knows where? It could happen but I don't see any real changes. And I think the pricing in the channel and I think the product mix would more than offset that. So I don't see any general margin pressures on the business. And again, the beauty of this business model is even if the retailers are challenged in their margin you have a full price business for them. So your gross margin return on investment. If you're a retailer, ultimately, what does every dollar return gross margin return on investment we would be one of the highest. So the average retailer would want to invest more in BIRKENSTOCK. And then it's just a matter of how much do we calibrate their growth versus our own growth versus the category growth that we want versus where we see the consumer shopping. And that's the dynamic of what as a brand manager, that's what we do every day. I mean, I'll just use the analogy, but great NFL quarterbacks have a great playbook. But the best step up to the line of scrimmage and every now and then, they read the defense and they call an audible. And that's the difference right now. You can't just have a playbook and say, I throw an interception but you go to the sidelines and you say to the coach, but that was the play. I knew he was going to intercept it. You need to call these audibles and it's becoming way more dynamic and way more complex than it ever was. It's like that for our retail partners. It's like that for the brands that are managing their businesses. And quite honestly, that's what makes it fun for us because we're dealing with the product that people love. They don't just like BIRKENSTOCK. They Love, with a capital L, BIRKENSTOCK. We don't have consumers, we have brand fans. Figuring out where these fans are going to intersect with our brand and in their lifestyle, what are the use occasions for the brand, that's the fun part of it. Being here, that's not the fun part.

All right. Well, with that, I'm afraid we are out of time. Thank you, David, so much for sharing your insights, and thank you to all of those in the audience who listened in.

Thanks, Brooke.