Written by Colin Fisher
An Initial Public Offering (IPO) allows a privately owned company to place its shares on a stock exchange that could then be purchased by both institutional and retail investors (Ashford, 2023). On October 11th, Birkenstock Holding PLC introduced its Initial Public Offering, which failed to live up to expectations. In the past ten years, Birkenstock’s IPO opening day performance ranks as the sixth worst of 95 IPOs to have raised over $1 billion (Linnane, 2023). For those unfamiliar with its business, Birkenstock has been selling German comfort-shoes and sandals since 1774. Prior to Birkenstock, other recent footwear companies to go public were Allbirds, On, and Dr. Martens, all of which took place before the COVID-19 pandemic (Bell, 2023). Some analysts, such as Matt Powell, an advisor at Spurwink River and senior advisor at BCE Consulting, believed that such a pause could work in favor of Birkenstock given there was “A lot of money on the sidelines.” Furthermore, Birkenstock’s ability to be a major player in the growing U.S. footwear market led people to believe they were primed for a promising IPO. According to accesswire, Birkenstock set its offer price at $46 per share, giving it a valuation of $8.6 billion. Some thought that Birkenstock would even revive the sluggish IPO market. However, these beliefs were quickly proven wrong as Birkenstock shares fell 13% at the time of its IPO (Cohan, 2023). Ciara Linnane, MarketWatch’s investing and corporate-news editor, labeled Birkenstock’s IPO as “One of the worst debuts for a billion-dollar deal in a decade.” Originally viewed as a potential boost to the IPO market, the Birkenstock IPO was a huge disappointment. This discrepancy between potential and actual results poses the question of what went wrong with the Birkenstock IPO.
According to analysts, there are many reasons why Birkenstock’s IPO failed to live up to its lofty expectations. First, Birkenstock appears to have simply set its share price too high. The company’s valuation was clearly much higher than the public’s. Moreover, investors still lack confidence in the market after the COVD-19 pandemic, making many hesitant to buy stocks, particularly in a company new to investors. In addition, the performance of other publicly traded footwear companies have not fared well in recent years, making Birkenstock a less desirable investment given its industry. Finally, Birkenstock CEO, Oliver Reichert, did not have any prior experience leading a publicly traded company, potentially damaging the confidence of investors who may have been interested in buying its stock. A combination of these factors likely led to Birkenstock’s disappointing IPO (Cohan, 2023).
A major reason for Birkenstock’s dismal showing is the stark difference in opinion between Birkenstock and the public regarding the company’s valuation. This disparity resulted from the public’s lack of faith in Birkenstock’s business plan. For example, many analysts doubted Birkenstock’s plan for growth in the United States and Asia, citing “a cost-of-living crisis,” which would limit the amount of customers in these countries willing to buy higher priced footwear (Eddy and Nerkar, 2023). They viewed these markets as ill-suited for Birkenstock’s expensive merchandise. In addition, some analysts believed that Birkenstock’s valuation was not accurately aligned with its relatively slow growth. David Trainer, CEO at investment research firm New Constructs, indicated that Birkenstock’s $8 billion valuation would only be justified by tripling Birkenstock’s 2022 revenue to “more than $3.8 billion.” Birkenstock’s inflated IPO valuation was further demonstrated in that it was greater than other companies in the footwear industry, such as Allbirds, Skechers, Crocs, and Steve Madden (Cohan, 2023). Birkenstock appears to have been too bullish in its valuation, which significantly damaged its IPO.
Current investors have not embraced recent IPOs as enthusiastically as many companies had hoped. Prior to the COVID-19 pandemic in 2020, a company’s high valuation would not have intimidated investors. Instead, investors were eager to purchase a stake in a company whose brands they bought firsthand. This excitement in the marketplace allowed companies to set valuations based on higher multiples. For example, Allbirds’ initial valuation was $2.2 billion, which was ten times greater than its fiscal 2020 revenue, which stood at only $219.3 million (Waldow, 2023). Now investors fail to embrace such higher multiples. In addition, privately owned fashion companies are less inclined to go public in the near future. These companies fear that the fragile state of the market limits the potential for a successful IPO, which sentiment was further supported by Birkenstock’s failure. Lastly, Marla Greene, an associate professor of fashion merchandising and Marketing at LIM College, indicated that the possibility of rising interest rates could potentially discourage future investments (Waldow, 2023). Higher interest rates would increase the opportunity cost of investing in Birkenstock, making investors hesitant to place their money in its stock.
Moreover, investors are often motivated to purchase a company’s stock if other companies in the same industry have had a successful IPO. However, previous IPOs of footwear companies were not a sign of encouragement for people looking to invest in Birkenstock. The stock of many of these companies is now sold at values significantly lower than their original offering prices. For example, Allbirds’ stock has decreased 96% from its IPO in November of 2021, and Dr. Martens’ stock has decreased 75% from its IPO in February of 2021 (Cohan, 2023). Such drastic disappointments in the IPOs of major footwear companies likely dissuaded investors from buying Birkenstock shares at their original offering price. Typically, an investor is less willing to buy stock in a company operating in an industry where previous IPOs have failed to make them a profit.
The confidence an investor has in a stock largely depends on his or her belief in the future success of the company. When a company’s prospects are uncertain, investors are hesitant to buy its shares. Given that Birkenstock’s CEO had never run a publicly traded company, uncertainty is exactly what was generated. Many investors may have questioned the qualifications of Mr. Reichert as CEO and his ability to lead Birkenstock as a publicly traded company (Cohan, 2023). Such doubt would have discouraged investors from taking the gamble of purchasing Birkenstock in the face of other less risky alternatives.
Originally expected to revive the IPO market, Birkenstock’s IPO is now considered a massive failure. The combination of an overpriced company valuation, unstable market, previous industry failures and the inexperience of its CEO with public companies gave investors enough doubt that they shied away from purchasing Birkenstock. Consequently, the future of the IPO market is still in question, and investors will have to wait for another company to bring it back.
Works Cited
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Cohan, P. (2023, October 12). “With Shares Down 13%, Birkenstock Won’t Revive The
IPO Market.” Forbes. https://www.forbes.com/sites/petercohan/2023/10/12/shares-down-13-birkenstock-wont-revive-the-ipo-market/?sh=4e4dbe135a6f
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Raises $1.48 Billion in Its I.P.O.” The New York Times. Birkenstock Raises $1.48 Billion in Its I.P.O. – The New York Times (nytimes.com)
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Linnane, C. (2023, October 16). “Birkenstock’s IPO was one of the worst debuts for a
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Waldow, J. (2023, October 13). “Birkenstock’s lackluster IPO could be a
warning sign to other brands.” Modern Retail. https://www.modernretail.co/operations/birkenstocks-lackluster-ipo-could-be-a-warning-sign-to-other-brands/#:~:text=Birkenstock%E2%80%99s%20lackluster%20performance%2C%20according%20to%20analysts%20and%20experts%2C,a%20lack%20of%20confidence%20in%20the%20footwear%20sector.