Here’s why Birkenstock shares fell nearly 16% last month

Shoe company stock Birkenstock (Birk -1.83%) In August, it fell 15.6%, according to data provided. S&P Global Market IntelligenceThe company’s stock price had actually risen nearly 8% at the end of the month before plummeting on August 29, the day the company reported its third-quarter fiscal 2024 results. As you might expect, investors were disappointed by the numbers.

To be clear, this isn’t because Birkenstock’s numbers were bad; in fact, the company set records. The London-based company reports its financial statements in euros, but in dollars, third-quarter revenue was more than $600 million and net income was about $80 million. Both figures are strong.

But there was a difference between the strong numbers and what investors were hoping for, which is why Birkenstock’s shares fell: Investors were likely hoping the shoe company would post better growth and raise its full-year outlook, but that didn’t happen, leading to disappointment.

Whatever happened to Birkenstocks?

Like other shoe companies, Birkenstock sells through retail partners (known as B2B revenue) and directly to consumers (known as DTC). Ideally, companies can increase their revenue by selling directly to customers, because it leads to higher sales and potentially better profits. But in the third quarter, Birkenstock’s B2B revenue grew much faster than its DTC revenue.

Stifel Analyst Jim Duffy noted this when lowering his price target on Birkenstock’s stock to $63 per share from $70. According to The Fly, Duffy noted that growing B2B revenue will slightly reduce top line revenue, impacting profitability.

In other words, if Birkenstock’s DTC had grown as fast as its B2B revenue in the third quarter, the numbers would have been a bit better. Investors were disappointed by the record numbers because those expectations didn’t materialize.

How should investors treat Birkenstock shares?

Birkenstock shares trade at about 70 times earnings, a valuation that’s too high for most stocks, but especially for a shoe stock. Duffy doesn’t think the valuation is too high, since Birkenstock is still experiencing double-digit growth, but it’s enough to give many investors pause.

But I will say this: Footwear stocks often trade at cheap valuations because investors don’t have a good understanding of long-term trends. What’s in style today may not be in style tomorrow. It’s hard to stay relevant in this industry. But Birkenstock has been around longer than the US, so it may have some staying power.

If Birkenstock can continue its double-digit growth, Duffy may be right that its current valuation isn’t all that expensive. But investors should remember that there are other shoe stocks with similar growth rates and more attractive valuations. So, for now, it may be best to stay on the sidelines.