Fast-fashion Competition Will Squeeze Footwear Margins While Sustainability Offers Relief

Key Takeaways

• Rising competitive pressures and consumer caution threaten Allbirds' premium pricing, sales volumes, and long-term revenue growth despite gains in sustainability and digital transformation.
  
• Cost-saving initiatives boost margins, but low repeat purchases, heavy marketing needs, and shrinking brand distinction limit sustained profitability and market expansion.
  
• Ongoing profitability struggles, margin pressures, reduced direct sales, and limited brand diversification threaten Allbirds' ability to achieve sustainable growth amid uncertain consumer spending.

Catalysts

Manufactures and sells footwear and apparel products for men and women in the United States and internationally.

• While Allbirds is capitalizing on an expanding consumer appetite for sustainably produced and eco-friendly products through its ongoing material innovation and recent circularity initiatives, the company continues to face pressure from fast-fashion brands and lower-priced sustainable competitors, which threatens Allbirds' ability to command premium pricing and could limit future revenue growth.
  
• Although the direct-to-consumer digital transformation and recent revamp of Allbirds' website may improve conversion rates and drive customer loyalty over time, persistent consumer caution regarding discretionary spending and increasing aversion to non-essential purchases risks suppressing sales volumes and revenue recovery even if the digital strategy succeeds operationally.
  
• While Allbirds' strategic reduction of physical retail doors and transition to a distributor model have delivered immediate bottom-line improvements and working capital benefits, these changes have compressed the company's top-line growth and may constrain brand awareness and expansion in key international markets, potentially limiting long-term revenue potential despite current cost discipline gains.
  
• Despite a broadened product range and accelerated pipeline of new style launches to address growing interest in health, wellness, and versatile footwear, Allbirds still faces the structural challenge of relatively low repeat purchase rates and the ongoing need for elevated marketing investments, which could weigh on net margins and delay the achievement of sustainable profitability.
  
• Although Allbirds' track record and advancements in sustainability position it well amidst increasing regulatory focus on environmental transparency, the rapidly intensifying efforts by major footwear and apparel brands to advance their own sustainable offerings reduces Allbirds' first-mover advantage and raises the likelihood that future competitive pressures will intensify, narrowing the path to meaningful market share gains and long-term earnings growth.

Allbirds Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Allbirds compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Allbirds's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Allbirds will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Allbirds's profit margin will increase from -49.4% to the average US Luxury industry of 5.4% in 3 years.
• If Allbirds's profit margin were to converge on the industry average, you could expect earnings to reach $10.4 million (and earnings per share of $1.3) by about August 2028, up from $-84.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Luxury industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 3.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.26%, as per the Simply Wall St company report.

Allbirds Future Earnings Per Share Growth

Risks

• The company is facing a notably uncertain macroeconomic environment, which management cited as a reason for reducing their full-year revenue outlook, suggesting sustained weakness in consumer discretionary spending may restrain future sales growth and top-line expansion.
  
• Allbirds continues to be unprofitable, as shown by persistent negative adjusted EBITDA, and despite cost controls, guidance still calls for significant EBITDA losses, indicating that profitability and earnings improvements are far from assured.
  
• The transition from company-operated stores to a distributor model and additional store closures are reducing the company's direct revenue base and further limiting brand touchpoints, posing risks to brand awareness and constraining top-line growth in the medium term.
  
• Year-over-year declines in gross margin, attributed to planned promotional activity, inventory adjustments, channel mix shifts, and higher freight and duty costs, highlight the risk that margin pressure could persist in a competitive environment and challenge future profitability and earnings.
  
• Despite increased investment in product launches and marketing, Allbirds may struggle to broaden its brand identity and product range beyond sustainable sneakers, potentially capping its total addressable market and limiting long-term revenue growth potential.

Valuation

• The assumed bearish price target for Allbirds is $8.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Allbirds's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $192.8 million, earnings will come to $10.4 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $7.03, the bearish analyst price target of $8.0 is 12.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.