• Brett Schafer

Not So Deep Dive: Allbirds Stock



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Watch on YouTube



Show Notes


(Ryan) What they do: The first line of the S-1, “We make better things in a better way, through nature”. (Is this the vaguest mission statement you’ve ever seen?) Allbirds is essentially just a footwear and apparel company. And their original shoes were made with Merino wool. And the shoes are very basic, no logo, usually just one or two colors. It was designed to be sort of minimalist, they called the design strategy “the right amount of nothing”. And the shoes are also really comfortable, especially the wool ones. So all their footwear offerings are made from sustainable materials, including the laces and the insoles.


They currently have 14 different shoe styles (not 100% sure) but over 50 different products across footwear and apparel. The other apparel offerings can be put into two groups. Lifestyle and performance. Some are meant for more casual wear, while some can be used for athletics.


Another important note: They are a B Corp.


(Ryan) History: Fascinating background actually. So Timothy Brown, who Brad will mention in a sec was a soccer player from New Zealand. He went to school at University of Cincinnati, where he played soccer, but afterward, he was able to join a pro team in New Zealand. He was actually good enough to be on the national team and played in the 2010 world cup, where they tied Spain. (Irrelevant but fascinating)


Pro soccer players always get a month or so off each year and after the world cup he used that month to test the design skills that he got while studying at Cincy. He was never a big logo guy and so he went to a factory in Indonesia and asked them to make 1,000 pairs of this really minimalist shoe. And they did and so he took the shoes and sold them to his teammates at the time for full-price and they all liked them. By that point, he had decided to retire from soccer and instead started trying to do this full time. He got connected with his co-founder, Joseph Zwillinger, through their girlfriends and he had much more business savvy than Tim, so the two of them teamed up and grew from there. That was all-around 2015.


They’ve had plenty of funding rounds since and they finally IPO’d less than a month ago. Kind of a testament to how fast companies are able to grow now thanks to creator tools.


(Brett) Industry/Landscape/Competition:

  • Allbirds is in the shoe and apparel industry, which is very easy to quantify. Worldwide, estimated $1.9 trillion in sales in 2020. Allbirds ambition is to sell into as much of it as it can

  • Competitors: Nike, Adidas, Lululemon, plus dozens of other companies. For reference, Nike LTM revenue is $46 billion


(Brad) Management and Ownership:


Management

  • Joseph Zwillinger -- Co-CEO and co-founder (40)

  • He was a VP at an industrial products company called TerraVia

  • BOD at a SPAC called Big Sky Growth partners

  • Consulted at Deloitte and was an Analyst at Goldman

  • He’s really the engineer and the sustainable architect behind the product

  • 100% glassdoor rating but just 70 reviews

  • Timothy Brown is the other Co-CEO and co-founder (40)

  • He’s a New Zealand native with a passion for wool

  • A former manager in innovation strategy and business development at Redscout (brand consulting)

  • Former vice Captain of the New Zealand World Cup soccer team

  • Michael Bufano is the CFO since April 2021

  • Former CFO at Panera

  • was most recently advising early-stage companies

  • Joe Vernachio is the COO

  • Former VP of Global Product at North Face

  • Former President of Mountain Hardwear

Ownership (Dual-class share structure) -- assuming full exercise of options and before the offering data

1. Maveron and Dan Levitan, Tiger Global, T Rowe Price and Fidelity own 38.3% of the total voting power almost entirely in class B stock

2. Joseph has 10.3%

3. Tim has 12.3%

4. Executives together own around 37.4% of the combined voting power



(Brett) Valuation:

  • Market cap of $3.5 billion, ticker BIRD

  • P/S of 14.5

  • P/GP of 27.5

  • Given the need for these types of businesses to continually advertise, it will be important for investors to watch for operating margin expansion as Allbird’s tries to grow its customer base while also spending a lot on R&D

  • 17.9 million outstanding stock options before the IPO, will need to watch on that as their granting pace looks like it could present a headwind for shareholders.


(Ryan) Earnings:

  • Had $219M in revenue in 2020, up 13% from 2019 and 74% from 2018.

  • 51.4% gross margins vs 46.9% GM in 2018

  • 89% of sales came from their digital channels in 2020, while 11% came from physical retail stores

  • They grew their store footprint from 3 in 2018 to 22 by the end of 2020.

  • They’ve got an operating margin of -13%

  • And they spend about 25% of their revenue on marketing

  • The adjusted EBITDA margin is slightly better at -7%

  • One really interesting point that I saw in the S-1, “In 2020, 53% of their net sales came from repeat customers.”


(Brad) Balance sheet and liquidity:


Balance sheet

1. Raised about $300 million in its IPO to add to its roughly $95 million in cash and equivalents

2. Has a $40 million credit revolver and it drew down the first $14 million of that last year (rates of around LIBOR + 2.5)


Anecdotal Evidence:

  • (Ryan) I’m a repeat customer. So is my brother. It’s really good for like nice, casual, or going to work. Can be worn with shorts or pants. I don’t even shop around, I just go directly to their website, hope they have the color I want, and buy it.

  • (Brett) Seems like it has the potential to reach the top-notch brand status like Nike, Adidas, and Lululemon. Still a lot of progress to get there though.

  • (Brad) They sell my favorite shoes


Future growth opportunities:

  • (Ryan) I’m really not sure there is anything they can do in terms of product expansion that will move the needle. They have to find more ways to get in front of the customers and they’re doing that with the $50M+ in marketing expenses and store expansions. They may have some pricing power as well. Right now, they’re about $100. They target a sort of affluent customer demo and these things are sort of a status symbol, so I would think they’d be able to up prices a bit.

  • (Brett) A simple one is expanding store count. They only have 27 right now but are getting to the size where they could be beneficial for driving sales and brand awareness (apparently only 10% of the U.S. population knows of Allbirds). Similar to the Nike store, they could have big stores highlighting all the research they are doing with sustainable apparel to get people interested in the brand.

  • (Brad) ESG-younger generation niche with the whole 30% lower carbon footprint


Highlights and lowlights:

  • (Ryan) Highlights: Cohort analysis is really promising. 53% of sales from repeat customers. If that trend persists, the high marketing spending now could totally be worth it. Plus I like the omnichannel strategy. In-store sales should look a lot better moving forward. Lowlights: I’m not convinced that they’ll be able to succeed in apparel and I haven’t seen anything to convince me otherwise. Also, I’m not sure how hard the shoe style would be to replicate.

  • (Brett) Highlights: Loyal customers, decent unit economics, and potentially a long runway for investment if these types of products become wanted by everyone. Management seems component and focused on the right things but hard to tell with them just going public. Lowlights: Worries about the path to profitability while growing (as with all apparel companies), sustained need for market spend, and no true competitive advantage outside of brand power. Shoe Dog, the Nike biography by Phil Knight, exemplifies how precarious these companies can be (they almost collapsed many times).

  • (Brad) The product is amazing and the brand seems to be really resonating with people. You know you have brand power when you can pull your shoes off of Amazon’s marketplace. Lowlights, most people have access to wool in New Zealand. This is about running as fast as you can to capture brand power and ubiquity to build durability and profitability likely won’t be attainable during that time. I think spending is the correct decision.


Bull Case:

  • (Ryan) They get acquired. I think this is a logical fit for a bigger retailer to purchase. Most likely, Lululemon. Lululemon is trying to get into shoes, Allbirds is trying to get into clothes, and neither one of them seem to be doing too well at it. Not to mention I wear the two together all the time. Outside of an acquisition, it’s going to take a lot for them to fill this valuation. 15% FCF margins feel like the ceiling here and they aren’t growing sales too quickly.

  • (Brett) They reach a similar status to the top casual shoe/apparel companies in the world, build out 100 profitable stores across the U.S, and consistently expand margins as they scale (it will likely be slow expansion though as they live in the physical world).

  • (Brad) They can find similar success with apparel that they’ve found with their shoes to grow the addressable market and enhance optionality. Pandemic massive headwind


Bear Case:

  • (Ryan) It is just a shoe company, a great shoe company, but a shoe company nonetheless. And the simple design gets replicated.

  • (Brett) No true competitive advantage leads to everyone else copying their innovations over time, making their products a commodity. I also wouldn’t discount how the lack of a logo may lead to the need for more marketing spending than the competition. If only 10% of the U.S. population knows about them, why is that?

  • (Brad) This is just a shoe company and is already starting to exhaust its low-hanging fruit for growth before reaching profitability.


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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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