Birkenstock ‘s recent initial public offering (IPO) is expected to help boost shares of British footwear brand Dr. Martens , according to Investec analysts. German shoe brand Birkenstock’s debut on the New York Stock Exchange earlier this week has given investors and analysts insight into the financials and metrics of a sizeable single-brand footwear company for the first time. Using this information as a benchmark, Investec analysts believe that there is significant growth potential for London-listed Dr. Martens and that the market may be underestimating its prospects. “Birkenstock is a good example of how big a footwear brand DOCS could become, and the profitability it could achieve,” said Invest analysts Kate Calvert and Ben Hunt, referring to Dr. Martens’s ticker DOCS, in a note to clients on Oct. 3. The analysts pointed out that Birkenstock’s sales last year were slightly higher than Dr. Martens’ projected sales this year. However, the German company sells over twice the volume of footwear as Dr. Martens, which has a higher average selling price. These figures have enabled Investec to forecast that the British company’s goal to double revenue to £2 billion ($2.45 billion) is “achievable,” compared to £1 billion currently. The investment bank expects shares of Dr Martens to rise to £2.15 over the next 12 months, indicating an upside potential of 65% from current levels. Shares of the company have fallen by nearly 40% this year. DOCS-GB YTD line Similarities and differences Birkenstock’s business model and brand ethos have many similarities to Dr. Martens, according to the analysts. Both companies have a vertically integrated production model and a multi-channel distribution strategy focused on direct-to-consumer sales. However, they also differ as Birkenstock owns its five factories in Germany , while Dr. Martens subcontracts the manufacturing of most of its products across seven countries. The analysts said Birkenstock’s scale and vertical integration likely explain its lower operating costs at 27% of sales versus 37% for Dr. Martens. Undervalued or overvalued? Investec analysts say Dr. Martens trades at an inexpensive valuation that reflects concerns over temporary underperformance in the U.S. rather than its strong cash flow generation and growth potential. The analysts say investors are not currently appreciating the company’s ability to return to double-digit annual growth as sales in Europe and Asia-Pacific regions continue to perform well. In contrast, analysts at RBC Capital Markets take a more cautious view on “luxury” stocks like Dr. Martens. RBC pointed to signs that the luxury market is above historical levels and is due to moderate. Earlier this week, shares of Europe’s largest luxury company, LVMH , dropped to their lowest level of the year after the company reported a slowdown in revenue growth below expectations. The investment bank believes aspirational middle-class consumer growth that drove the luxury sector over the past two years is fading, and companies will find that prices need to be balanced with lower volumes going forward. RBC said it has a “Sector Perform” rating, equivalent to “hold” at other investment banks, on Dr. Martens. It expects shares to rise 15% to £1.30 a share over the next 12 months.
