Bank of America raised their rating on Birkenstock (NYSE:BIRK) shares from Neutral to Buy, citing the shoemaker’s “increasingly rare” growth.
“In a backdrop where earnings beats are becoming increasingly rare, we think BIRK’s sustained sales momentum and strong margins will be rewarded with a higher multiple,” analysts said in a note.
BIRK shares rose nearly 3% in premarket trading Thursday.
Alongside an upgrade, BofA also raised its price target on the stock from $62 to $65 to reflect higher EBITDA estimates, chiefly driven by an improved sales forecast.
“Given the recent struggles of key retail growth stocks, BIRK’s consistency stands out and deserves a premium, in our view,” analysts added.
BofA’s team points out that increased capacity is enabling BIRK to achieve stronger sales growth, a trend it believes will continue, making the company's mid- to high-teens sales growth target over the medium term appear increasingly attainable. The analysts forecast sales growth of 20% in FY24 and 16% in FY25.
The bank also highlighted an “attractive” outlook for the second half of the year. Analysts said BIRK’s FY24 sales guidance of 20% constant currency implies a notable slowdown compared to the 26% and 23% growth in the first half of 2024, whereas most retailers are forecasting accelerating second-half trends.
Although there is less visibility in the second half due to the direct-to-consumer (DTC)-heavy mix, the analysts are confident that balanced growth across geographies and products (sandals and closed-toe) will continue.
Birkenstock has been in an unusual position where demand has exceeded supply, leading the company to prioritize key markets like the US and Europe. Notably, Asia currently accounts for only 11% of sales, BofA highlighted.
"With production doubling over the next several years, BIRK will have sufficient product to open distributors and a larger direct-to-consumer business in Asia. We model 25-35% annual growth in the region but think demand remains stronger," the analysts wrote.
For FY24, BofA models an EBITDA margin of 31%, despite a 150 basis point increase in ramp-up costs for new capacity. They expect margins to expand in fiscal 2025 as Birkenstock brings these factories closer to full production and the headwind from ramp-up costs diminishes.