Birkenstock Holding Plc Q4 FY2024 earnings call

• Fiscal 2024 had very strong growth, with 22% constant currency revenue growth. Adjusted EBITDA margin was 30.8%. Closed - toe silhouettes revenue grew over twice the overall group rate and increased share to about 1/3. APMA business grew 42%. Own retail revenue grew over 2x the overall business with 20 new stores opened in fiscal 2024. Launched orthopedic innovations, professional lines, and expanded outdoor assortment. Increased pairs sold by 14% while maintaining disciplined distribution and over 90% full price realization. Wholesale business grew 23% with over 90% growth from existing doors. D2C business grew 21% with 40% penetration. Membership base grew over 30% to over 8 million members. In Americas, B2B strengthened in the second half with strategic partners, DTC had mid - teens growth and 4 new stores opened. Europe had 21% growth with double - digit unit and ASP growth, both closed - toe and sandals grew double digits, and 3 new stores opened. APMA region grew 42%, added 13 new own retail stores and had strong digital channel performance.

In fiscal 2024, the Americas segment saw revenue up 19%, Europe had 21% growth, and APMA region grew 42%. Americas revenue was 19% higher than fiscal 2023. Europe's growth was broad-based across countries and channels. APMA was the fastest - growing segment at 42%, still only 12% of overall revenue mix. Americas segment's B2B strengthened in the second half with strategic partners, and DTC in Americas had mid - teens revenue growth with 4 new stores opened. Europe's growth was 21% with double - digit unit and ASP growth, both closed - toe and sandals grew double digits, closed - toe grew over 2.5x faster than sandals. APMA region grew 42%, added 13 new own retail stores, and had strong digital channel performance.

• Expect revenue growth of 15% to 17% in 2025 with balanced growth from DTC and B2B. Gross margin should improve year - over - year moving closer to 60% target. EBITDA margin expected in the range of 30.8% - 31.3%, an increase of up to 50 basis points compared to 2024. Effective tax rate projected to be around 30%. Plan to invest approximately EUR 80 million in capital expenditures in 2025 related to production capacity and retail store expansion. Target leverage ratio for end of fiscal 2025 is approximately 1.5x. Q1 2025 is expected to be in the higher end of the 15% - 17% revenue growth guidance range even against tough comps.

Q: Congrats on another nice quarter. So Oliver, you cited 15% to 17% growth is the right pace for a healthy long - term business. I guess why do you think that's the right pace going forward? Or any structural change in drivers relative to the past decade of 20% - plus growth? And just near term, could you give us some color on what you're seeing in the first quarter relative to that 15% to 17% pace as you are cycling the toughest compare at 26% growth a year ago.

A: And regarding Q1, we are seeing globally a very strong holiday season. Given what we've seen this in Q1, we feel very comfortable that Q1 will likely come in the higher end of our 15% to 17% annual revenue growth guidance range. Even against the strong comps last year. Remember, last year, there was like a 26% growth. So we do think that ending up at the higher end of our guidance range, will be a strong signal for the brand and the global demand, which is definitely outstripping our supply here.

Q: Oliver, can you give a little bit more color on 1Q, just how DTC versus B2B is performing? And how are you thinking about B2B versus DTC in F '25 overall, how are you planning the business around that 15% to 17% in each of those segments? And then can you maybe talk about gross margin by a quarter, assuming 1Q is not up year - over - year, but just wondering when you're looking for gross margin to inflect positive?

A: Paul, this is Nico. Thank you for your question. I'm taking the first one on DTC and B2B growth going forward. So what we will see is definitely we'll continue to see a balanced growth between DTC and B2B throughout fiscal 2025. Certainly, with some nuances from quarter - to - quarter as some quarters are more sell - in and some orders are more sell - through driven. Please be reminded that online represents 90% of our DTC currently. So in other words, retail is just presenting 10% of our DTC, and we've been executing our retail expansion plan with great success. Recently opened stores are performing really well, and they're performing well from day 1. Paris Le Marais that opened in Q4 is our top - performing store in Europe, Chengdu store is welcoming 4,000 visitors every week, outperforming our expectations. And then Austin stores also really outperforming our expectations. Please be assured we haven't secured more locations, more exciting locations to open this fiscal year. So你 will hear us more talking about retail expansion, and you'll see retail gaining more weight in our DTC channel. Our overall view on channel growth is that we want to fulfill demand where it occurs. While we really remain disciplined in our distribution for B2B. As you know, 90% of growth is really coming from existing wholesale partners. And what they do is they expand our offering. They offer more shelf space and they go with a wider offering to their consumers. So this gives us a broader reach to consumers with a broader assortment and let consumers enjoy the full breadth of our brand. We remain disciplined in our distribution for B2B, and this is a high quality and profitable growth with a full price realization that is superior to any other brand out there.

Q: Let me keep going on the gross margin and how we should think about it going forward into 2025, are there any other unusual items we need to think about as we look out at the quarterly trends? I know there was a big reclassification in 4Q as we roll into 1Q, 2Q? Is that an appropriate baseline to think about a year ago? And then on revenues, I guess, to double click a little bit. Thanks for the color on first quarter. You mentioned the tough compares in the quarter. But obviously, the DTC compare is obviously very tough in the first quarter. Anything to think about between the 2 channels in the fourth quarter as that obviously affects margins. And then finally, on SG&A, I'm just curious if you could speak to the cadence that's spend this year? Is it -- it hasn't really aligned very closely with revenue growth in the past and can have a pretty material difference on earnings quarter - to - quarter. It started growing in the mid - 20s last year and ended the year much, much lower. So I'm curious as SG&A snapped back to mid - to high teens in the first half? Or is it best to think about it as like a high single - digit growth rate in the first half and it accelerates its revenues through the year?

A: Michael, this is Alexander. Thanks for the question. I will take the first and the third part of your question. And with our numbers in '24, the quarterly cadence, we are quite confident that this is a good basis to model the '25 quarters. So '24 is completely clean. There is no hiccups, no unusual items you need to know about. And of course, we have some seasonality. I'm sure you are aware of that, especially with the higher DTC penetration, the first and then the fourth quarter, impacting gross margins and also SG&A ratios. But overall, '24 is a good basis to start with for '25. And then maybe just one last remark on gross margin. Erik mentioned that we are seeing -- yes, a slight uptrend of the margin in '25. This will likely to happen in the back half of the year.

Q: As you think about it, I believe, the pairs were up 14% this year, ASP up around 8% this year. How are you thinking of that going forward, especially given the production capacity that's coming more online? What are you looking at? And it also sounds like the traffic in stores, did it continue to accelerate in the current quarter? What are you seeing, given the increased penetration of stores and the new store openings. And just anything more on wholesale in the Americas, what you're seeing on order trends? Is it still more from existing accounts? Or there are new ones, too?

A: Dana, this is Nico. I'm going to take the first part of the question, and then I'll hand over to my team colleague, David, to give us some color on the Americas piece. So on units versus ASP growth, we definitely see volume being a bigger driver of growth than previous years. As you know, finally, we have the capacity to really unlock white space categories such as the APMA on our APAC region, our closed - toe product category, but also other business areas such as [ Profenyl ]. These are all incremental fields of play to our unit growth. Further to that, this increased capacity is also benefiting our B2B business. It really allows us to gain shelf space with existing partners that are widening their assortment and offering. Even with that high unit growth, we expect a positive ASP contribution to revenue growth driven by mix predominantly, but also like - for - like pricing going forward.

Q: I wanted to ask a three - part question, if I may. Last year, for fiscal year '24, you opened 20 stores how many stores should we assume for this year? And should it be really weighted to Asia? That kind of leads us to the second question. I think, Oliver, you mentioned China is only 15% of your APMA region, so about EUR 30 million still very small, but can you talk about the positioning of the brand in China and what do you think is the longer - term opportunity? And then lastly, you mentioned that the closed - toe offering was roughly 1/3 of the business. Where do you think that goes for FY '25 and longer term?

A: This is Nico again. Thank you for your question. I'm going to do the first part of it, which is stores related, and then I'm going to hand over to Klaus for the Asia piece. As you know, retail is a massive growth pillar for us. We are currently operating 67 stores, adding and have added 20 stores in 2024. We have plans to open more. We are very disciplined in regards of the locations that we go after, but also our return requirements. Cash payback on investment is, as you know, within 18 months. So yes, we do expand, but we also expand very consciously, if you will. Our aim for fiscal '25 is to increase the door fleet by 50%. So that's a significant growth of our door fleet. And as I said, every store that is opened is performing and has to perform really well from day 1. So你 see us having some really exciting locations lined up. We just opened -- in Europe, we just opened in Cologne, we opened in Amsterdam, more to come. As I said, Paris is a very, very great success story in Europe, and so there are many others in the other regions. So more to come on that.

Q: Just to unpack closed - toe a little more. Can you give us some a little flavor on the drivers within that category. Is that the Boston just getting a lot more breadths in the assortment that's driving a lot of that? Or are there other kind of views that are kind of driving. Can you give us a little more flavor of what's driving closed - toe? And again, do you think that, that could approach 40%, 50% of the mix going forward? And lastly, what is the difference in ASP on average of closed - toe versus sandal?

A: Randy, it's David. First off, there's no copy and paste globally on closed - toe. The beauty of the business is closed - toe encompasses everything from clogs to boots, and we're seeing positive momentum across every element of closed - toe. In the U.S. specifically, it has been driven by clogs. The beauty of that is it's not just the Boston. It's also the Tokyo. There's a new clog called the Lutry, with a convertible strap that you may have seen out at retail that's selling very, very well. And the impact of clogs actually is even spilling over to our Zermatt slipper, which has been in the line for 5 to 6 years and because of the interest in clogs is now having its best season in its entire history. Obviously, from an ASP standpoint clogs overall, as do all of closed - toe to have a higher ASP than sandals in general. I don't know what that exact dollar amount is. But clearly, the mix certainly changes the ASP. Again, I think the velocity of it is the sell - throughs it are much higher than they are across the total collection in anything that's closed - toe right now. I think Europe is seeing a bit more of a closed - toe shoe and boot reaction, so I'll pass this to Nico.

Q: Hope you and your families have a very happy holidays. Erik or Alexander, just as we think about the model that we can see from the outside, are you comfortable that we're past the restatements, regional P&L, et cetera? And then just higher level. Really great revenue, congrats, strong brand resonance. Can you share some thoughts on how you're thinking about promotional environment at large, maybe with the competition versus what你're seeing for you guys? And then just -- maybe speak to the -- how you clear the last chance on your side versus wholesale clearance. I know there's a breath for a step element there that you can see versus that you can see. So any color there, promo environment clearance approaches on relevant. And then how you're thinking about the progression of gross margin next year in the context of lapping Pasewalk, maybe when that becomes a good guide to gross margin?

A: That sounded like a long question, but thanks, Simeon. So let me start with your comment regarding the P&L. It's very clear. It's not a restatement. It's a reclassification of internal logistics costs, which can be shown in sales and distribution and can be shown on the clogs and some companies do it like this, so we sort of cleaned it up from '23. And now as the majority of companies do it. And so it showed in our gross margin. So that's a reclass of internal logistic costs, noncash impact EBITDA, as you have seen, also no impact. So I think that's important to see and to understand. And to come to your question, yes, we feel fine and then we had the first year of being listed used to sort of look at all the details. And then if you see the quality of the numbers and where we came from as a family run company, I think we had a big improvement now. And I'll hand over to David.

Q: Congrats on the strong quarter and year. I wanted to ask about pricing. It looks like price accounted for about half of the 8% ASP increase in 2024. Call it, 4%. Is that a good way to think about 2025 as well? And a similar question on mix. That was also a big driver. Should we expect much of a change there for 2025. Thank you.

A: Mark, this is Alexander. Thanks for the question. And你're absolutely right. So when you're looking into '25, I think, Nico mentioned also that we are expecting approximately 2/3 unit growth, approximately 1/3 in ASP growth. And yes, ASP is primarily driven by like - for - like pricing and product mix with consumers continuously buying more into higher price points and premium products. We mentioned closed - toes as an example here. So higher leather share, but also product embellishment are supporting this trend and this will continue into the future. Retail will have on the channel expansion. But overall, in '25, we are not expecting a major influence on ASP from a channel mix.

Q: I just want to dig into the DTC business a little bit more, especially in the Americas, but in total. When -- in the Americas, the DTC business represents probably around 40 - plus percent of the sales. And of that, 90% -- over 90% is digital. Will most of the DTC growth that happens in fiscal '25 happen out of Asia and Europe ex the stores and then those stores that open later drive incrementally. Is that the way to think about it?

A: Yes. Sam, it's Megan. Obviously, we don't -- we're not providing by channel, by region. But I think to your -- to get to your question, yes,你're right on the DTC side on the U.S. predominantly e - com. And I think that as we look to DTC growth in the U.S., a lot of the additional growth in DTC will be coming from the additional stores. And we will see DTC growth contribution coming from the other regions. In particular, we're seeing very strong DTC growth both on the digital side and in the retail side coming from the APMA region, and that will continue to drive DTC growth higher, particularly as we move into the latter part of this year and those stores and the digital channels continue to ramp there.

Q: I just wanted to get more color on what你're seeing from a customer lens. Is there any change you're seeing in either repeat purchase behavior or a number of pairs owned? And also curious what你're seeing in terms of the customer demographic. Are you seeing a younger audience? Or I'm just curious what你're seeing there.

A: This is Nico. Thank you for your question. So in regards to repeat purchases, we do have a very strong buildup of our membership base currently 8 million members. There你 use your imagination how fast this can still grow. It's growing -- has been growing 30% year - on - year with already now members spending 30% than nonmembers. So what we also typically see with members is they sort of transcend into other categories with us, let's say, more expensive categories, but also newer categories, such as shoes, laced - up shoes, install business, that is typically adopted much faster than with members than with nonmembers. We've done a great job in becoming clearer on our member segments. So你'll see us becoming more personal in how你 treat our members. And more exclusive. We have a very, very large amount of product that is exclusively meant for members that is displayed online. And that also typically sells through much, much faster than the rest of the line. So yes, a very healthy growth in membership, a very healthy business with members, but yet to be growing significantly.

Q: I want to ask on cash flow and capital allocation. The 1.5x net leverage guide at the midpoint of adjusted EBITDA implies just modest improvement in the net debt. Can you talk about free cash flow objectives? You've given us CapEx. Is there some sort of offset to cash generation in the working capital lines? Or does that imply some use of cash such as share repurchases?

A: Thank you. It's Erik. Happy to take over. Yes, we are comparatively cash rich, which shows the strength of our business, and we hit the target of below 2x leverage, 1.8x end of the year. And the goal for next year is around 1.5x. Going forward, the plan is much the same as it was this year. First of all, invest in the business. That's always first priority. So if something is needed, if we think it helps the business, we will do it. And around EUR 80 million is the plan for current year. Afterwards, continue to pay down our debt. We expect, as I said, 1.5x leverage end of the year. Eventually pay off the U.S. term loan. And everything after this will be a decision made by the Board, obviously. But the strength of our business and the very strong cash flow conversion shows that we are on the right way.

Q: Congrats on a great year. I just wanted to come back on APAC to understand if -- what are the P&L implications of APAC? Is it gross margin accretive? Is it operating margin dilutive? And just maybe an anecdotal, but moving from APMA to APAC, is that linked to particular managers or particular synergies by regrouping regions or countries together in a different manner than in the past?

A: Erwan, this is Alexander. I'll take the first part and then hand over to Nico. So to keep it simple on the margin side, with that share of business -- of course,你 don't get the full leverage, if you compare that to a much more bigger business, but we have really nice price points in the regions. Some markets are already quite developed. And we expect in the mid - to long term, no margin pressure from making that region bigger. So it's definitely supporting that margin. But in some markets, to be fair, when starting that up and ramping,你 don't have the full profitability in year 1 or year 2, but this is fully built into our plan.

Q: Great. I guess, you talked a lot about closed - toe shoes and some of the newer products. You just talked about your injection molded sandal business and how that performed in 4Q and what你expect to see in that business next year?

A: Jay, this is Oliver. You're talking about the PU segment, the outdoor water - ready sandals. So we are just working on this new segment. Actually, it was invented to cover the more humidity tropical conditions around Southeast Asia and the AMPA region in total. All of a sudden in the U.S. at the outdoor segment and in Europe, this starts performed pretty good. So it's just a new category that will be rolled out globally. There will be also coming up some collaboration styles and some special makeups in some areas, where we push and introduce these new wearing occasion in the, let's say, soft hiking, outdoor - ish water - ready environment. You may see some of it in REI in the U.S. or globe trotter and some other outdoor doors in Europe. So it's a very promising start for this new category. And that's why we invested in Pasewalk in this kind of manufacturing process because it's technically wise, it's completely different set up than the classical plastics sandals.

Q: I'll just stick to one. Just a follow - up on the manufacturing that you just mentioned. In terms of your investments and the factory expansion plans, how are they progressing versus your expectation? And how do you expect the additional supply to evolve over the next 2 to 3 years?

A: Adrien, I think we touched on that question earlier in the call, but let me just wrap up that here's everything on plan, not only in the new factory, also the other 2 more. And this is not a plan which is done in 6 or 12 months. We started in '22, and this will last until '26 especially building out Görlitz. This is absolutely on what we expected so far. The drag on margin is nothing what will continue in '25 and '26. So for now, all good year.