Birkenstock Holding plc (BIRK) Earnings Call Transcript

Good morning, and thank you for standing by. Welcome to Birkenstock's Third Quarter of Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Megan Kulick, Director of Investor Relations.

Hello, and thank you, everyone, for joining us today. On the call are Oliver Reichert, Director of Birkenstock Holding PLC and Chief Executive Officer of the Birkenstock Group; and Ivica Krolo, Chief Financial Officer of the Birkenstock Group. Today, we are reporting the financial results for our fiscal third quarter ended June 30, 2026. You may find the press release and a supplemental presentation connected to today's discussion on our Investor Relations website at berkenstock-holding.com. Results have also been filed on Form 6-K with the SEC. We would like to remind you that some of the information provided during this call is forward-looking and accordingly is subject to the safe harbor provisions of federal securities laws. These statements are subject to various risks, uncertainties and assumptions which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at berkenstock-holding.com. We undertake no obligation to revise or update any forward-looking statements or information except or as required by law. We will reference certain non-IFRS financial information. We use non-IFRS measures as we believe they represent the operational performance and underlying results of our business more accurately. The presentation of this non-IFRS information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS. Reconciliations of non-IFRS measures to IFRS measures can be found in this morning's press release and in our SEC filings. Now I'll turn the call over to Oliver.

Good morning, everybody. We performed exceptionally well in Q3 and once again demonstrated the strength of our brands. Given this continued momentum for fiscal 2026, we raised our guidance for revenue growth to 15% in constant currency and adjusted EBITDA of at least EUR 710 million. We delivered another strong quarter. Our revenue grew 15% in constant currency at the high end of our annual target of 13% to 15%. EMEA growth accelerated to 15%. PCC growth accelerated to 16% in constant currency. Adjusted EBITDA margin on a like-for-like basis improved 60 basis points year-over-year. We achieved this despite an increase in costs, especially freight rates due to the conflict in the Middle East. We returned capital to shareholders by repurchasing EUR 230 million in shares. We also refinanced and upsized our senior notes at a 75 basis point lower rate. We continue to grow in our white space. APAC continued its high quality and DTC-led growth, especially in China. We accelerated the pace of retail expansion. We are on track to meet our target of approximately 140 doors by the end of fiscal '26. Importantly, owned retail revenue grew 50% in constant currency. Same-store sales were up high single digits. We saw a strong acceleration in EMEA digital growth, capturing more demand in our own e-com channel. Growth store penetration was up 500 basis points, consistent with recent trends and in line with our goal to expand usage occasions for our footwear. Product mix contributed over half of the growth in ASP. We saw double-digit growth across all of our regions. Our Americas business was up 14% in constant currency. Used retailers and sporting goods stores continue to lead B2B growth with sell-out as key partners in these channels up above 20% year-over-year. Within the Americas DTC business, we saw very strong retail growth as we continue to open stores to capture more in-person shopping demand in our own doors. We opened 4 new stores in the U.S., bringing the total to 21 in Growth in EMEA was 15%. In the largest, most important quarter for EMEA, we saw accelerating consumer demand, especially in our D2C business, both online and in-store with strong full price realization of 93%. We opened 4 stores during the quarter, bringing the total in EMEA to 50. APAC grew 23% in constant currency. Excluding Australia, APAC growth was close to 30%. Australia's growth in the quarter was impacted by a shift in quarterly cadence as a result of the distributor acquisition. We are very confident in our APAC target for the full year. Importantly, we had over 50% growth in China, the country with the highest ASP, a testament to our high-quality premium brand positioning in the region. Within the APAC segment, we opened 5 new owned stores, bringing the total to 53. On the product side, we continue to innovate and drive means in both [indiscernible] and sandals. This innovation is most visible with our premium 774 collection. We introduced new Rafa, Canvas and premium leather executions in Naples, Boston, Arizona and [indiscernible]. We also collaborated most recently with Song for the mute and Repetto, a very successful launch, targeting the female let and growing popularity of ballet flat. This global movement also resulted in a very strong demand for the Mery Jane style, Santa Clarita, one of the newest mainline solid launches. This once again demonstrates our ability to create a trend within our brand. While demand for the box remains very strong, other drop execution also performed exceptionally well. For example, the Naples grew by more than 4x the units sold year-over-year. We also saw very strong growth in shoes led by [indiscernible], Lesotho, which more than doubled in units sold year-over-year. Overall, non-Boston close to executions were up more than 50%. About half of our top 20 silvers are close stores, including 3 that were introduced within the past 3 years. In our sandle business, we saw the strongest growth from our newest seasonal execution such as flowers, rivets, buckles, prints and textiles. Growth was especially strong in our Maari, Madrid and Ciena Silat. We highlight this newness most prominently within our D2C business, driving growth in our own channels. We remain super confident in the strength of our brand. We are purpose-driven and see strong global demand for the footbed. We target a diverse range of consumers across geography, gender, age and income. Our total addressable market is only limited by the global population. This gives us flexibility to drive growth regardless of global original macro conditions. We managed our distribution with discipline to maintain scarcity properly segment the market, manage channel growth and protect full price realization. Now I will pass the call over to Ivica to go through the quarterly results in more detail.

Thanks, Oliver. I'm happy to share with you details of Birkenstocks performance for the third quarter of fiscal 2026, which exceeded our expectations. We generated third quarter revenues of EUR 720 million growth of 13% on a reported basis. Growth in constant currency was 15% at the high end of our 13% to 15% expectation. The depreciation in the U.S. dollar, Canadian dollar and Asian currencies like the Indian rupee and the Japanese yen compared to the third quarter of 2025 caused a 180 basis points headwind to revenue growth in the quarter. For reference, in the third quarter of 2026, the average euro to U.S. dollar rate was 116 up from 113 in Q3 of fiscal 2025. We saw strong growth across all segments in the quarter. The Americas segment was up 14% in constant currency, continuing the trend we saw in the first half of the year and reflecting the consistent strength in our most developed market. EMEA was up 15% in both reported and constant currency a strong acceleration from Q2 driven by particularly strong D2C in Europe in both online and retail. We continue to see some localized impact in the Middle East related to the conflict in the Gulf region, particularly in the UAE, which is highly dependent on tourism and expert demand. This has been offset by strong domestic demand in markets such as Saudi Arabia. Overall, the Q3 performance was better than anticipated. APAC was up 23% in constant currency. APAC quarterly growth rates are skewed due to the changed revenue pattern from the Australia business. Prior to the acquisition, revenues were recognized when we delivered to the distributor before the peak season. We are now realizing revenues in line with the local market dynamics and seasonality. The Australian spring summer months are September to February, and D2C and B2B sell out peaks in these months. which aligns with our Q1 and Q4, which differs from the revenue realization pattern the transaction. Therefore, Q3 Australia growth was lower versus last year, which, as one of our top markets in the region had an impact on the APAC growth rate. Excluding the impact from Australia timing shifts, our APAC growth was close to 30%. We continue to expect APAC to grow at twice the pace of the other segments for the full year. By channel for the year, B2B was up 15% in constant currency consistent with the trends of the last few quarters on the back of continued strong demand with our key partners. B2C accelerated strongly to 16% in constant currency up 400 basis points from 12% growth in Q2 and outpaced B2B in the quarter. Our digital growth accelerated very nicely compared to the first half of the year. Many of the actions we are taking to drive improved conversion are beginning to show results. This includes improved content, enhanced user experience, including simplified checkout options and expanded loyalty and member benefits. Retail was up 50% as we continue to see very strong performance from our new and existing doors. We added 13 new owned stores, bringing our total to 124. Same-store sales growth was up high single digits. Adjusted gross profit margin for the third quarter was 59.2%, down 130 basis points year-over-year, mainly driven by 60 basis points of pressure from FX and 70 basis points of pressure from incremental U.S. tariffs. Adjusted gross profit margin, excluding these effects, was up 10 basis points year-over-year. While we continue to benefit from better capacity absorption, which contributed 50 basis points to adjusted gross profit margin, product mix caused a 40 basis points drag on margin. The ongoing shift to close to silhouettes comes with a slight margin drag due to the manufacturing complexity and higher consumption of production minutes. However, the shift is very beneficial for us as it yields higher ASP and higher gross profit per pair despite the slightly lower than average gross margin percentage. Selling and distribution expenses were EUR 186 million in the third quarter, representing 25.9% of revenue. This was up 3 basis points from the prior year, primarily due to accelerated retail expansion and some higher logistics costs as a result of the conflicts in the Middle East. General and administration expenses were EUR 33 million or 4.5% of revenue, down 40 basis points year-over-year due to lower IT expenses and fixed cost leverage. Adjusted EBITDA in the third quarter of EUR 242 million was up 11% year-over-year. The flow-through of FX effects reduced adjusted EBITDA by EUR 8 million. Excluding this FX impact, EBITDA was up 15%. Adjusted EBITDA margin of 33.7% was down 70 basis points year-over-year due to 130 basis points of pressure from FX and tariffs. Excluding these impacts, adjusted EBITDA margin would have been up 60 basis points. This improvement is despite the increase in freight and logistics cost. Adjusted net profit was EUR 134 million in the third quarter, up 15% year-over-year. Adjusted EPS for Q3 was EUR 0.74, up 19% from EUR 0.62 a year ago. The debt refinancing triggered a EUR 11.7 million expense from the accelerated amortization of the transaction cost and the derecognition of the embedded derivative of the original senior notes. The ASR attributed a EUR 10.6 million expense from fair value changes due to fare price movements during the term of the ASR. These onetime noncash expenses were recognized in finance cost and were excluded from adjusted net profit. We generated EUR 247 million in operating cash during the quarter compared to EUR 261 million in the prior year due to higher income tax payments totaling EUR 77 million. We ended the quarter with cash and cash equivalents of EUR 694 million. after the share repurchase of EUR 230 million and the refinancing and upsizing of our long-term senior notes. As a reminder, in June, we repaid EUR 428.5 million 5.5% senior notes due 2029 and issued EUR 900 million new senior notes due 2033 at 4.5%. The remaining excess cash added to the balance sheet gives us flexibility to further enhance shareholder value with an additional EUR 500 million share repurchase or the refinancing of other existing debt subject to market conditions. Our inventory to sales ratio was 37% in the quarter, up from 33% a quarter ago. The increase from last year is largely driven by the increase in capitalized tariffs and FX effects. Our DSO for the quarter were healthy 45 days, up slightly from 43 a year ago. During the quarter, we spent EUR 26 million in CapEx, adding to our production capacity in Arouca, Burleson Pasabag, beginning the buildout of [indiscernible] and continuing our investments in retail and IT. We also paid the second tranche of the purchase price for Business Stock Australia of EUR 9 million. Our net leverage was 1.8x as of June 30, 2026, up from 1.5x at September 30, 2025, reflecting the cash outflows from the ASR. Excluding the ASR, net leverage would have been approximately 1.4x. Turning to our outlook for the fourth quarter and fiscal 2026. In the fourth quarter, we expect revenue growth in constant currency within our annual guidance range of 13% to 15%. We expect FX to be relatively neutral in Q4, resulting in similar growth rate on a reported and constant currency basis. On margins for Q4, we expect FX to be neutral. On tariffs, given the recently announced agreement with the European Union and the implementation of Section 301 tariffs, we now expect a blended tariff rate for Q4 of just over 15%, below what we have experienced under the Section 122 tariffs. As a result, tariffs should also be relatively neutral year-over-year in Q4. For the full year, we now expect revenue growth of 15% at the high end of our guidance range of 13% to 15%. For the full year, the FX drag is expected to be 350 basis points. For the full year, we continue to expect adjusted gross margin of 57% to 57.5% and adjusted EBITDA margin of 30.2% to 30.5%, inclusive of approximately 200 basis points of pressure from FX and U.S. tariffs combined. Adjusted EBITDA is now expected to be at least EUR 710 million for the fiscal year. Our expected tax rate is 30% to 31%, up from our prior forecast of 26% to 28% due to the nontax deductible expenses largely associated with the ASR and debt issuance. Including the tax impact of the accelerated share repurchase as well as the refinancing and upsizing of our senior notes, adjusted EPS is expected to be EUR 1.90 to EUR 2.05 in line with our prior forecast. This includes approximately EUR 0.15 to EUR 0.20 of pressure from FX. This does not include the impact of any additional share repurchase beyond the ASR completed end of June. CapEx should be in the range of EUR 110 million to EUR 130 million. We have a net leverage target for the end of fiscal 2026 of approximately 1.6 to 1.7x, up from our previous forecast of 1.3 to 1.4x after the impact of the ASR, but excluding any additional share repurchases. With that, I'll turn it back to Oliver to close.

Thanks, Ivica. We are super happy increasing our revenue growth target to 15% in constant currency and adjusted EBITDA to at least EUR 710 million. Our third quarter results once again proved that demand for our beloved brand remains strong. Even in times of inflationary pressure on consumer wallets, we remain an accessible and desired brand. We are excited about the opportunities in the fast-growing and under-penetrated APAC market and expanding our own retail fleet and in the newness and innovation within our brand. As we look towards the final quarter of our fiscal 2026 and beyond, we plan to continue to grow our share and expand our following within our new younger Talk Group, building lifetime connections with our consumers across regions and channels, drive innovation and create newness in both our close to and in our sandal business. actively steer product between geographies and channels to optimize margins, maintain scarcity and protect brand equity. Continue to use our strong balance sheet and capital allocation decisions to drive shareholder returns. Our organic growth generates substantial cash flow. Over the past 2 years, our operating cash flow totaled EUR 774 million. Our first priority remains to invest in the business. Of this EUR 774 million, EUR 189 million was invested in CapEx. Given our currently undervalued shares, we will look for opportunities to continue our buybacks. We will now take your questions.

[Operator Instructions] Your first question comes from the line of Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Oliver, nice recovery in direct-to-consumer growth this quarter came in above B2B for the first time in 2 years. Can you speak to drivers of the improvement in direct-to-consumer and what you're seeing in B2B relative to DTC? And then relative to the raised top line guide for the year, could you talk to trends in the fourth quarter? And do you think there's potential upside to your 15% top line forecast for the year?

Matt, thank you for your question. I'm -- maybe a bit hard to understand because I'm dialing in from [indiscernible]. I'm heavy selling shoes here, as you can imagine, quite a lot. Hopefully, you can hear me loud and clear. So to come back to your question, we delivered strong growth across both channels, of course, B2C outpaced B2B supported by the investments we are making in both own retail and in our own digital business. both channels are and will remain important drivers for our business. The D2C performance was driven by own retail, where our expanded footprint and faster store opening pace delivered 50% growth. Same-store sales were also strong, up high single digits, which reflects the continued demand for our brand across our existing store fleet. We also saw accelerating online growth. newness on the product side, greater personalization and strong storytelling or making the digital experience more compelling and driving the conversion. This was most impactful in Europe, where we saw a clear step-up in online performance with 93 full price realization, even as the broader market became more promotional, as you know. So we are focused on growing the business where we can and create the most value. That means continuing to invest in D2C while maintaining a strong disciplined B2B business. Our wholesale partners are an important part of our growth strategy. They give us efficient access to new customers, particularly younger consumers while helping us maintain high-quality distribution across our markets. Our 15% constant currency revenue growth guidance reflects the strength we are seeing today across channels and markets. And the last part of your question, we feel very confident about the momentum in the business. and our long-term revenue growth target is 13% to 15%.

Your next question comes from the line of Laurent Vasilescu from BNP Paribas.

Oliver and team, I wanted to ask about EMEA. EMEA growth accelerated nicely versus Q2. Did you see any impact from the conflict in the Middle East. Could you provide additional color on key drivers behind the acceleration in growth? And to what extent that favorable weather conditions contributed to the growth relative to the underlying trend in the business? And curious, are you seeing any continuation of these trends into 4Q within EMEA?

Laurent, thank you for your question. It's Ivica. So indeed, we did continue to see an impact from the conflict in the Middle East, although certainly, it was less pronounced than in Q2, basically at the onset of the conflicts back then. We were able to mitigate much of the pressure through adjustments in the delivery routes and strength in the other parts of the region. For instance, if you think of Saudi Arabia, very resilient market and less dependent on tourism and experts. So in general, Q4 is a larger quarter in the Middle East. So we expect slightly more of an impact also due to the resumption of hostilities in the region itself. That said, we expect the total second half impact to be below the EUR 10 million to EUR 12 million we originally estimated. We now see this totaling high single-digit millions. Overall, the growth acceleration was largely driven by D2C demand, as Oliver already mentioned, Demand proved very resilient across the region, and we saw nice growth in both retail and online. We're also seeing the benefits of the investments and actions we've taken to drive traffic and improve conversion. This is also something we spoke about in January at our Capital Markets Day, and this includes enhanced upper funnel online marketing, stronger content and optimization of the inside experience, and this is all contributing positively. So on the weather, definitely warmer temperatures are generally favorable to our business. However, we are already seeing improved trends ahead of that, and those trends have continued into the first weeks of our fiscal Q4. And finally, to note, there was bad weather in some of our other markets in Q3 as well.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

So pricing over inflation was not a contributor to gross margin this quarter as it has been for the past few Were you more promotional? And how should we think about your ability to pass inflation through with pricing when customers are a little more price sensitive? Are you seeing any signs of consumer pushback on pricing, particularly in early back-to-school?

Lorraine, it's Ivica. So all pricing decisions are made with the goal of passing through inflation and protecting gross margin, something that we do very consistently. There can be timing differences from when we take pricing and when the inflation works its way through the inventory and flows through the COGS, and please keep in mind here to date the pricing over inflation benefit to gross margin is 30 basis points. On promotion, at an overall industry level, we see indeed a higher markdown activity as retailers compete for a more constrained consumer wallet. In this context, we continue to deliver a superior full price realization and gross margin. This basically underlines the strength of our brand and our markdown discipline, which remains unchanged. We are and will selectively discount as we always have. Any active markdown we do is to effectively manage our seasonal excess stock as our business continues to grow. So as you know, 75% to 80% of our business is core products and evergreen styles. Our markdown assortment is centered very much around prior season merchandise, seasonal colorways and broken size ones. And the beauty of our brand is we serve a broad range of price points from to $50 to $1,500 and remain accessible when consumers are tightening up their spending. For those consumers who are more price sensitive, we offer executions in pipefloor, EBA or textile, for example. And importantly, any action we have taken are not negatively impacting our margin. As you can see from our results, gross margin was even up 10 basis points on a like-for-like basis. And finally, on back-to-school. We continue to be a must-have brand for the school year, and we continue to see a very strong youth-driven demand in the U.S.

Your next question comes from the line of Krisztina Katai an equity research analyst.

Congrats on a good quarter. You've provided helpful color that the shift towards close dose silos created, I think, a roughly 40 basis point pressure on gross margin. Can you help us quantify that further? What is the difference in gross margin between close to and open to? And then secondly, maybe if you could provide more color on the components of growth this quarter just across ASPs and volume.

Krisztina, it's Ivica. Thank you for your question. And first, on the margin impact. So as you know, we don't disclose specific margin on a product level. But the complexity of higher ASP, non-Boston close to shoes and boots executions require more labor input and consume more production minutes. So this quarter, we saw an over 500 basis point increase in our cost share, and this is driven by over 50% growth in the non-Boston silhouettes. with Naples, units up more than 4x and UT more than doubling year-over-year in Q3. That impacted the gross margin. These are great, highly profitable products, which are helping us to attract new consumers and broaden the use occasions for the footbed. And they generate a higher ASP and profit dollars prepare although a slightly lower but still very strong margin. And we use contract manufacturers in Portugal for some of their production. So in-sourcing parts of this production now, the demand is scaling is the future margin opportunity for us, definitely. And then on your second -- the second part of your question on ASP versus volume, it was very much in line with our 1/3, 2/3 target and reflects the continued build-out of our production capacity across the network, which is progressing according to plan.

Your next question comes from the line of Michael Binetti with Evercore ISI.