Creating and selling trendy shoes has always been a tough business and often been a tough road for investors. Just look at the history of Skechers (SKX, Financial) and brands like LA Gear. A recent entry in the trendy shoe category is Allbirds Inc. (BIRD, Financial). The company manufactures and sells footwear and apparel products for men and women on global basis. The company offers a range of lifestyle and performance shoes and apparel, which are organic and made on a sustainable basis.
Incorporated in 2015, the San Francisco-based company is expected to generate $255 million in revenue in 2023 and currently has a market capitalization of $159 million.
Holiday season
During the company’s third-quarter 2022 earnings call in November, company management warned of “increased choppiness” in the consumer purchasing environment. They cited international-related issues such as foreign exchange effects and Covid-19 lockdowns in China, but also persistent inflation and high levels of promotional activity. Discounting apparel at above-average levels typically pressures gross margins. Looking ahead to 2022 Christmas buying, the company noted it was seeing the most promotional environment since 2016. However, company management stated they had a great “road map” to manage the potentially difficult holiday season with the right mix of inventory and a strong and effective marketing campaign. In a statement, Co-Founder and Co-CEO Joey Zwillinger said, “I feel confident as we head into this all-important season despite the noisy external environment."
Financial review
Despite the upbeat tone, the company reported a very tough fourth quarter earlier this month. Sales decreased 13% to $84.2 million, while the gross profit decreased 25% to $36.3 million. Gross margins headed in the wrong direction and decreased to 43.1% from 50.1% in the prior-year period due to the promotional environment. The adjusted operating loss for the quarter was $22.1 million, more than triple the loss from the fourth quarter of 2021.
For the full year, operating cash flow was negative at $90.6 million and with capital expenditures of $31.4 million, the company’s burn rate was $122 million. Cash and cash equivalents declined to $167.5 million at year end compared to $288.5 million at the end of 2021. Inventories were $116.8 million, an increase of 9.3% compared to $106.9 million at the end of 2021. The company had no debt and $40 million in availability on its line of credit (since increased to $50 million).
This line of footwear was often the choice of trendy tech company employees in Silicon Valley, but it appears they may have moved on to something else. Allbirds also tried to engage with famous athletes to promote high-performance running shoes, but, according to Zwillinger, "customers weren’t ready for us to serve them in that area.”
Strategic initiatives
Due to the company’s poor recent performance, a strategic transformation plan was announced in order to improve sales growth and drive profitability. The plan includes a new highly focused brand and marketing strategy that reconnects with its core customers as well as optimization of its core U.S. store locations. The company is also evaluating potential distributor partners in international markets to grow internationally in a more efficient manner. Improving capital efficiency and maintaining cost savings initiatives that started in 2022 are also key priorities.
Valuation
The company provided first-quarter 2023 guidance that was below expectations and called for revenue to decrease between 20% and 28% and an Ebitda loss between $26 million and $29 million. At these burn rate levels, the company may run out of cash in early 2024.
Allbirds is not expected to generate positive net income or Ebitda in 2023 so normal valuation metrics are not available. And with no positive earnings or cash flow on the horizon, its hard to utilize the GuruFocus discounted cash flow calculator.
The average price target from 11 Wall Street analysts that cover the company is $2.84 with a high target of $5 and a low of $1.50.
Guru trades
Gurus who have purchased Allbirds stock recently include Mario Cibelli (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies and First Eagle Investment (Trades, Portfolio). Investors who have sold or reduced their positions include Paul Tudor Jones (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).
Summary
Allbirds' difficulties may continue in 2023 despite the strategic initiatives put into place, particularly if economic difficulties continue in the U.S. Persistently high levels of inflation may take a toll on discretionary purchases such as trendy organic shoes.
With a liquidity position that may only last five or six more quarters, the company is dependent on the capital markets to survive. Based on the current state of the financial markets, particularly in the banking sector, financing may not be available over that time period.
Allbirds may find a way of out its current tough situation by being acquired by a larger apparel company. However, that remains uncertain and the stock does not appear to be a great investment unless the company finds a way to generate positive cash flow.
