The rating agency S&P Global assigned a ‘B’ rating with a stable outlook to BK LC Lux Finco 1 Sàrl, the parent company of Birkenstock. The rating comes after the private equity firm L Catterton and its affiliates, including Financière Agache, the investment company of the Arnault family, agreed to buy a majority stake in the German group. The deal is expected to close by the first half of 2021.

S&P said that the acquisition is expected to be financed by €1,075 million of senior term loans, €430 million of other senior unsecured debt, a €275 million vendor loan and an equity contribution of about €2.0 billion.

S&P’s credit review also offered an analysis of the structure of the German shoemaker. The rating agency commented that the Birkenstock brand has “strong equity power within its niche category of sandals and orthopedic footwear products”, a good control of the supply chain and manufacturing process to maintain a consistent level of product quality and has a relatively low risk associated with fashion changes than other apparel brands.

It noted that Birkenstock is trying to expand its customer base, including through partnerships with other brands, such as Valentino and Stüssy. “Although, brand awareness outside Europe and North America is relatively low, the company intends to increase penetration in markets like China and India. We note that, compared with the average for branded apparel, Birkenstock spends a relatively smaller amount on marketing activities and this supports sound profitability metrics,” it added.

During 2012-2020, Birkenstock’s revenues rose by a compound annual average of about 19 percent, materially outperforming the global footwear industry. The company’s top three markets account for more than 60 percent of total sales. During the fiscal year ended Sept. 30, 2020, Birkenstock posted revenue growth of 1.2 percent year-on-year. Birkenstock has been able to offset the impact of the Covid-19 pandemic’s impact on wholesale and physical retailing thanks to an 81 percent increase in online sales, according to S&P. 

Due to the trends towards casualization, premiumization, sustainability and wellness in footwear, the business environment will be more challenging for formal shoes, while sport and casual shoes could enjoy some long-term benefits also supported by the shift to working from home, the rating agency estimates.

Despite moderate entry barriers in footwear, Birkenstock is protected as it operates in a relatively small segment that does not appeal to most of the larger footwear manufacturers, it noted.

The company’s distribution strategy is evolving, with an increasing focus on direct-to-customer (DTC) sales. But, wholesale remains Birkenstock’s largest distribution channel. During fiscal year 2020, wholesale business accounted for about 70 percent of total sales, e-commerce 25 percent, and physical retail 5 percent. North America is the company’s most advanced market from a distribution perspective, with DTC accounting for about 34 percent of regional sales.

Birkenstock expects the DTC channel to generate an increasing portion of sales, primarily thanks to acceleration in e-commerce. According to Euromonitor, in 2020, digital sales accounted for about 26 percent of the global footwear industry’s total (up from 11 percent in 2015), and this is broadly in line with e-commerce’s existing contribution for the German company.

As of September 2020, Birkenstock owned 52 stores. As part of brand building and better DTC exposure, Birkenstock expects to open selected new stores, primarily in Europe, outside Germany, and the U.S.

S&P pointed out that over 70 percent of Birkenstock’s annual sales are generated from five models with the original “Arizona” model being an important contributor.

It expects the company to have an adjusted debt to Ebitda ratio of 7.0-7.5 over the next two years which is manageable thanks to its cash flow generation. The rating agency anticipates a gradual deleveraging thanks to organic growth and discipline in discretionary spending.

Birkenstock is forecast to generate adjusted Ebitda margins of 27-28 percent and an annual free operating cash flow (FOCF) of €120-150 million. The rating agency believes that the company will maintain an Ebitda interest coverage above 3.0 times.

S&P would likely lower the shoemaker’s rating if FOCF is materially weaker than anticipated or if the Ebitda interest coverage ratio falls toward 2.0 times. Conversely, it could improve the rating if the adjusted debt to Ebitda ratio fell below 5.0 and FOCF reaches 10 percent, or more, of debt.