Allbirds Stock: This story is more shaky (NASDAQ: BIRD)

Spencer Platt

Although the market has rallied over the past two months from the dire tale at the start of the year, there is no doubt that the bull market in the economy is entering a more icy period. The rate hike has reduces business expenses; layoffs and hiring freezes worry consumers; and, in turn, consumer spending also declines.

All the birds (NASDAQ: BIRD), the maker of wool-based sneakers, is just beginning to feel the effects of this slowdown. Earlier in the year it sold investors on its history of aggressive store expansions and product category additions, but now the company is signaling a more cautious tone.

In early August, Allbirds released fiscal second quarter results and restated its guidance for the year. Although the stock is now off its post-earnings lows, Allbirds remains down more than 65% year-to-date.

Chart
BIRD data by YCharts

The key question for investors now: is this a “buy the dive” moment for Allbirds? While I was previously a proponent of Allbirds stock rallying during this downturn, the latest news from Allbirds Q2 release has me feeling much more hesitant about the stock. I change my opinion of Allbirds to neutral.

For now, I see Allbirds as a more balanced bag of positives and negatives. On the good side of this name:

  • Allbirds continues to gain market share. Its mid-teens growth rate (which at one point was in the mid-20s) indicates much stronger growth than the footwear industry as a whole. Also note that Allbirds is still a national (if not even regional) company, with much of its market in its home base on the West Coast. There’s plenty of room here for expanding its brand recognition, especially with the company’s sustainability philosophy resonating well with many young consumers.
  • Product expansion. The company just launched its latest generation of Tree Flyer running shoes and said performance running shoes now account for 24% of its revenue. Expanding into different shoe styles will continue to broaden Allbirds’ appeal.

At the same time, however, we should beware of the following:

  • Decline in gross margin. Allbirds products aren’t expensive, but they aren’t cheap either. The company has already raised the price of its base “Tree Runner” model from $95 to $105; it may not have much more leeway to pass on rising costs to customers without sacrificing sales. But the reality is that raw materials as well as logistics costs are squeezing Allbirds’ margins, and its planned opex cuts may not be enough to salvage its profitability.
  • Relatively limited liquidity. At the end of the second quarter, Allbirds had $207 million of cash on its balance sheet and $40 million of spare capacity on its revolving line of credit. FCF consumption in the first six months of FY22, meanwhile, was -$81 million. Allbirds could find itself in a position where it needs to raise additional capital soon, just as capital markets tighten.

The bottom line here: there’s a lot more risk now in Allbirds’ history, and I’m no longer confident in the stock’s ability to easily outperform the S&P 500. Given the stock’s already steep declines after earnings and the fact that the market has already adjusted to the reset of expectations, I don’t see much more downside risk, but I also don’t see any significant catalysts that could trigger a rally.

Second quarter recap and forecast cut

Now let’s get into more details about the news shared by Allbirds in its Q2 update. First, take a look at the Q2 revenue summary below:

Allbirds Q2 Results

Allbirds Q2 Results (Release of Allbirds Q2 results)

Allbirds’ revenue rose just 15% year-on-year to $78.2 million, slightly beating Wall Street expectations of $77.8 million, but slowing significantly from 27% growth. % YoY in the first quarter. This despite opening seven net new outlets in the second quarter (compared to four openings in the first quarter), five in the United States and two internationally, bringing the company’s total base to 46 outlets.

Here are some additional comments from CEO Joey Zwillinger on the market dynamics seen by management:

In our industry, high levels of inventory and promotion have started to impact digital and retail traffic trends. Our client tends to have an above average income and so there was a lag on the impact of inflation, but this trend became noticeable in the US from the second half of June.

One of the biggest advantages of our business model is that our sophisticated data platform and direct relationship with our client allows for rapid visibility into changing demand signals. As a result, we are likely seeing this downturn before many others in our industry and therefore were able to pivot earlier.

In our international markets, currency headwinds have intensified since May. In China, although COVID restrictions have eased, they are persistent and are now reflected in lower consumer spending. And sentiment in Europe continues to be negatively affected by the ripple effects of the Ukraine crisis.

With respect to our guidance objective for 2022, we are taking a cautious view of demand in the second half and are proactively managing our business assuming these headwinds will continue through the end of 2022. We expect the The biggest impact of this change, since our last call, will come from the United States.”

Now, there is several good news here. One is that compared to 2020, revenue is up 55% – so the business has at least rebounded dramatically since the pandemic. Second, the company’s price increases in March proceeded “in line with expectations,” with higher revenue offsetting any lower volume.

Despite this, however, gross margins still slipped. As shown in the chart below, adjusted gross margins fell to 51.0%, 510 basis points lower than 56.1% in the second quarter of the previous year (and much worse than that if the one-time inventory depreciation is taken into account).

Allbirds Gross Margins

Allbirds Gross Margins (Release of Allbirds Q2 results)

This weakness also impacted adjusted EBITDA margins, which fell to a loss margin of -11.8% – despite a slight profit in the second quarter of the previous year:

Allbirds Adjusted EBITDA

Allbirds Adjusted EBITDA (Release of Allbirds Q2 results)

In response to all of these headwinds, Allbirds enacted a grand reset of expectations. It cut its revenue forecast for the year to $305-315 million (10-14% YoY growth), which is a significant 9% drop from a previous forecast of $335-345 million. dollars (23% growth over one year). It also now forecasts a median adjusted EBITDA loss of -$40 million (-13% margin) from -$23 million (-7% margin) previously.

Allbirds Guidance Update

Allbirds Guidance Update (Release of Allbirds Q2 results)

Anticipating the difficult road ahead, the company also plans to reduce its workforce by 8%, while reducing office real estate, in the hope of generating $13-15 million in annual savings:

Allbirds Savings Plan

Allbirds Savings Plan (Release of Allbirds Q2 results)

Key points to remember

Now the good news here: Allbirds stays cheap. At the current share price near $5, Allbirds trades at a market capitalization of just $772 million. After deducting the $207 million in cash from its balance sheet, Allbirds’ bottom line the value of the company is 565 million dollarswhich represents a 1.8 x multiple of EV/FY22 turnover – a reasonable bargain for a company whose revenues are still growing in the mid-teens and generating a relatively high adjusted gross margin of 50%+.

That being said, momentum is hard to regain for growth stocks once it is lost. I don’t see any significant catalyst that can rekindle enthusiasm for Allbirds. Don’t expect a quick rebound here.

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