Earnings Call Transcript - BIRK Q2 2024

Operator, Operator

Good morning, and thank you for standing by. Welcome to Birkenstock's Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. The company has allocated 60 minutes in total to this conference call. I would like to remind everyone that this conference call is being recorded. I will now turn over the call to Megan Kulick, Director of Investor Relations.

Megan Kulick, Director of Investor Relations

Hello, and thank you, everyone, for joining us today. On our call are Oliver Reichert, Director of Birkenstock Holding PLC, and Chief Executive Officer of the Birkenstock Group; and Erik Massmann, Chief Financial Officer of Birkenstock Group; David Kahan, President of the Americas; Nico Bouyakhf, President, Europe; Klaus Baumann, Chief Sales Officer; and Alexander Hoff, VP of Finance will join us for the Q&A section. Please keep in mind that our fiscal year ends on September 30th, thus our second quarter of fiscal 2024 ended on March 31st, 2024. You may find the press release and a supplemental presentation connected to today's discussion on our Investor Relations website birkenstock-holding.com. Additionally, we have included in the press release tables and presentation the quarter release for fiscal year 2023 in order to aid in your year-over-year comparisons. We would like to remind you that some of the information provided during this call is forward-looking and accordingly is subject to the safe harbor provisions of the federal securities laws. These statements are subject to various risks, uncertainties, and assumptions, which could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at birkenstock-holding.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During the call, all revenue growth rates will be cited on a constant currency basis unless otherwise stated. We will also reference certain non-IFRS financial information. We use non-IFRS measures as we believe they represent operational performance and underlying results of our business more accurately. The presentation of this non-IFRS financial information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS. Reconciliations of IFRS to non-IFRS measures can be found in this morning's press release and in our SEC filings. With that, I'll turn the call over to Oliver.

Oliver Reichert, CEO

Thanks, Megan, and welcome to the Birkenstock team. We are very happy to have you with us, bringing the Birkenstock language to capital markets and helping us further develop this super brand. Good morning, everybody, and thank you for joining today's call. We are happy to be here with you to discuss another exceptional quarter. Once again, we achieved the highest revenue level for the second quarter in our company's history, driven by growing demand for our products across all segments, all channels, and categories. Accordingly, revenue grew by 23% versus our second quarter last year. We continue to see strong demand growth in our core markets and in the largely untapped white space areas we identified across segments, channels, categories, and usage occasions. Given the strong results achieved in the first half of fiscal 2024 and the continued demand growth we are seeing, we are pleased to be raising our fiscal 2024 guidance, continuing the 10-year 20% growth trend we highlighted during our IPO. We are increasing our fiscal 2024 revenue growth forecast to 20% on a constant-currency basis, up from our prior guidance of 17% to 18%, and an adjusted EBITDA margin in the range of 30% to 30.5%. Our second-quarter revenue growth was driven equally by an increase in ASP and units. ASP benefited from the continued shift to premium products, a favorable channel mix towards B2C, and the targeted sale price increases. Unit growth was strong across all segments, but especially strong in APMA, one of the key white space markets we have been highlighting. The additional production capacity we have brought online over the past six months in Germany and Portugal to fuel our supply capabilities is allowing us to meet the growing global demand for our products. While the overall global consumer market remains weak, Birkenstock achieved 23% growth, beating the market soundly as we continue to take share and become a must-have brand for key retail partners. As we and others have observed, consumers are increasingly becoming more selective and intentional in their spending. Consumers across all ages, segments, and price points are seeking brands they love, and Birkenstock is definitely one of these global super brands. The strength of the Birkenstock brands is evidenced by continued full-price realization of over 90% at key distribution partners in our DTC business. Our DTC channel was once again our fastest-growing channel in the second quarter of fiscal 2024 with 32% growth against the same period last year. We opened six new owned retail stores, bringing the total to 57. Our digital business also continues to perform very well, increasing 29% from the prior-year quarter. Members of our fast-growing membership program are highly engaged and most apt to expand their purchase of our brand, spending more per transaction than non-members. Growing the membership base of loyal fans through priority access to new products and limited editions is proving successful and remains a key focus for us in fiscal year 2024. Our B2B business, which represented 76% of our revenue in the second quarter, achieved healthy revenue growth of 20% against the same period last year, supported by high sell-through rates. This growth came despite a challenging wholesale market you have heard discussed by many of our peers. As a reminder, the second quarter is seasonally the highest B2B quarter due to sell-in for the spring and summer seasons. We saw a continued shift towards closed-toe silhouettes, including clogs and premium products during the quarter. Closed-toe penetration was over 25%, up 900 basis points from the prior year period. The premium offering across our range continues to resonate with the consumers, driving ASP up double-digits in the quarter. As an example of this, our big bucket line grew over 28% and sales of our newer braided styles have almost doubled year-over-year. During the quarter, two of our new premium styles, our new sandal, the Catalina, and the closed-toe Lutry ranked in our top 20. While we have generated significant momentum and compelling top-line performance from our new styles, our momentum with our Core Silhouettes remains strong. Revenue from our top-five Core Silhouettes, most of which have been around for close to 50 years was up over 20% in the quarter, highlighting the commercial relevance of these iconic models and most recognizable styles. Now let's move to our discussion of segment performance. Within our largest segment, the Americas, strong consumer momentum and demand for our brands continued in the second quarter. Revenue in the region was up 21% compared to the same period a year ago. DTC channel growth continued to outpace B2B growth, increasing our DTC share by over 200 basis points. Notably, 46% of digital DTC sales were from styles other than sandals as our brand fans continued to add Birkenstock products for different usage occasions. Over half of our digital revenue was generated from members of our membership program, who on average spend 15% more than non-members. And while our DTC revenue in Americas continues to be driven by our strong digital presence, revenue from our own retail doors continues to grow above average. Our newest flagship store in the Miami Design District has performed ahead of expectations with average order value 13% higher than other stores in the US, driven by a strong penetration of our premium 1774 collection. The second quarter was another strong one for the Americas B2B channel. Our key wholesale partners recognized the strength of the brand and appreciate the rapid turnover of our products. Accordingly, they have allocated more space to Birkenstock and increased purchases by over 30% compared to last year, driven by expansions of categories like closed-toe silhouettes. New points of distribution in the Americas accounted for a single-digit percentage of revenue with a heightened focus on specialty retailers, including sports-specific running retailers where the benefit of our footbed as a recovery from sport is finding strong end-use demand. In Europe, we delivered exceptional broad-based growth in the second quarter of fiscal 2024, underpinned by strong consumer demand. While the European retail market remained soft, Birkenstock continues to perform strongly, up by 21%, far outpacing any other brands. We saw strength in both the DTC and B2B channels. The strong growth in Europe is directly related to the distribution transformation efforts we have made in the region designed to grow ASP through more strategic placements that drives more premium-priced products. We saw ASP increase double-digits as demand for styles priced at over EUR100 grew by over 60% and reached over 50% of total sales. Closed-toe silhouettes grew by over 80% in the second quarter with some of our fastest-growing models like the Bostons up over 100%. DTC growth outperformed B2B growth due to the continued strong online demand, led by over 100% growth in France. Online demand for closed-toe premium leather, Big Buckle, and other premium products was up over 40% in the quarter. Our membership program more than doubled in the quarter versus last year and average order value was 25% higher than non-members. In B2B, we are increasing our shelf space and continue to be one of the top-performing brands for our wholesale partners in Europe. The spring-summer order book was the highest ever with double the order book for closed-toe from a year ago. Key retailers are increasing their purchases and shifting their volumes towards earlier delivery dates and like the Americas, the majority of the growth is coming from existing distribution partners. It is indicative of the strength of our brand that our fully implemented spring-summer 2024 price increases had no adverse impact on demand and our full-price realization in Europe remains very strong. APMA was again our fastest-growing segment in the second quarter of fiscal 2024 with revenue growth of 42%, driven almost equally by volume and ASP. Growth in the region was largely driven by our DTC channel with the digital portion of the channel nearly doubling compared to last year. In addition, we added five new owned retail stores, including four in India and one in Japan, bringing the total to 19. We also saw a healthy increase in B2B in the second quarter of fiscal 2024, which was driven by an expansion of our mono-brand partner store with 11 newly opened stores. Demand in APMA is broad-based and like other regions, has benefited from closed-toe silhouettes, including clogs, which more than doubled compared to the year-ago quarter. I will now turn it over to Erik to discuss our financial results in more detail.

Erik Massmann, CFO

Thanks, Oliver, and good morning, everyone. We're very pleased with Birkenstock's performance in the second quarter of fiscal 2024. While the broader consumer environment continues to be challenging, the health and strength of our brand are clearly reflected in our results. Birkenstock has become one of the few must-carry brands in the wholesale channel to drive traffic to the stores and our DTC channels continue to grow as consumers become more intentional in their purchases. Now, let's have a look into the details of second-quarter results. Second-quarter fiscal 2024 revenue was EUR481 million, growing 23% versus prior year. We generated double-digit growth across all segments and channels, demonstrating the desirability and resilience of our brand. Again, our DTC performance was strong, up by 32% versus prior year, driving DTC penetration up 200 basis points compared to last year. At the same time, we increased B2B revenue by 20%. Gross profit margin for the second quarter fiscal 2024 was 56.3%, down 320 basis points compared to prior year. Our ongoing capacity expansion, which will give us the bandwidth and the flexibility that will allow us to expand our footprint in underpenetrated segments and categories was the primary driver of the decline in gross profit margin, representing 220 basis points of the year-over-year decline. Margin was also impacted by the planned one-time government-incentivized inflation-related bonuses and wage increases for our production workforce implemented in the second quarter. Selling and distribution expenditures were EUR113 million, representing 23.5% of revenue in the second quarter of fiscal 2024, up 220 basis points year-over-year due to increased DTC penetration and retail store investments. G&A expenses were EUR20 million, down from EUR23 million in the prior year despite incremental public company costs as the year-ago quarter was impacted by one-time corporate event expenses and accruals that did not repeat this year. The G&A declined as a percentage of revenue by 180 basis points. Second-quarter adjusted EBITDA of EUR162 million was the strongest in company history and up 7% versus the second quarter of fiscal 2023. Adjusted EBITDA margin was 33.7%, down 470 basis points from the prior year, negatively impacted from the same temporary and one-time items we discussed in gross profit margin as well as the additional cost of expanding our retail and DTC presence and incremental public company and administrative costs. Adjusted net profit of EUR77 million was up 3% and adjusted EPS was EUR0.41, flat with the year-ago due to higher G&A mainly related to capacity expansion and the IPO-related share increase. Let's now have a closer look at our balance sheet as of March 31st, 2024. Cash and cash equivalents were EUR176 million as of March 31st, up from EUR169 million at the end of the first quarter. In the second quarter of fiscal '24, inventory was EUR651 million or about 40% of revenue, down from 44% in the year-ago second quarter. The seasonal increase in trade receivables to EUR200 million is in line with our expectations given our sizable Q2 wholesale shipments. With general payment terms in the range of net 30 to 60 days, monetization will largely be recognized in the next quarter. We will continue to deleverage using cash generated from operations. Our net leverage was 2.6 as of March 31st. Earlier this week, we announced the refinancing of our loans and credit facilities, including the early paydown of approximately $50 million of loans. We continue to invest for future growth. Capital expenditures totaled EUR17 million in the second quarter, bringing the total amount invested year-to-date to EUR35 million, mainly related to our production capacity expansion and new-store openings. With that, I'll hand it over back to Oliver.

Oliver Reichert, CEO

Thanks, Erik. And let me summarize our discussion. The exceptional results during the first half of fiscal 2024 demonstrate the resilience of our business and our ability to achieve strong double-digit revenue growth. We are executing on our proven engineered distribution strategy to drive both volume and ASP growth and meet the growing consumer demand for our products, both classics and new, emerging products, and across all segments and channels. We continue to significantly outpace our peers in Americas and Europe with strong growth momentum in our DTC footprint and increasing demand from our loyal and steady B2B partners. At the same time, we are entering the next chapter of our growth trajectory as we tap into our largest white space market, the APMA region. Increasing brand awareness and taking market share while following our playbook of disciplined engineered distribution to support ASP. Given the strong first half and the continued strong growth in demand we are seeing, we are raising our guidance for fiscal 2024. We now forecast total revenue of EUR1.77 billion to EUR1.78 billion which equals 20% constant-currency growth. In line with the compound annual growth we have achieved over the past decade, demonstrating the sustainability of our strong growth trends. We expect adjusted EBITDA margin of 30% to 30.5% and adjusted EBITDA of EUR535 million to EUR545 million. We remain fully committed to our medium and long-term targets of mid to high-teens revenue growth, gross profit margin around 60%, and adjusted EBITDA margin over 30%. So in short, we are very pleased to report that we have never been in a better position to grow our business. Birkenstock is 250 years strong and we have a long runway for growth ahead. I would now kindly ask the operator to open our Q&A session. Thank you.

Operator, Operator

And the first question today is coming from Matthew Boss from JPMorgan. Matthew, your line is live.

Matthew Boss, Analyst

Thanks and congrats on a great quarter. So, Oliver, could you elaborate on the brand's continued global momentum? And have you seen any change in business so far in the third quarter relative to the high-teens embedded second-half outlook? And then just from a cost perspective, what is supporting the raise to your full-year EBITDA margin outlook relative to three months ago?

Oliver Reichert, CEO

Thank you for your question, Matt. We are not seeing anything in the current trading that would lead us to be more cautious about revenue growth in the second half of the year. As you know, we only provide guidance for the full year and long-term, and we feel confident in our projected revenue growth of around 20% for 2024 at constant currency. This aligns with our 10-year track record, as mentioned in our IPO roadshows. While quarterly results can vary and shipments may shift, there can be fluctuations from quarter to quarter. Additionally, the second half will be more focused on direct-to-consumer sales, which gives us less visibility compared to the B2B channel where we have strong order book visibility. We are aware of what you described as a selective recession, so we are cautiously managing our outlook for direct-to-consumer sales with that context. Nevertheless, our results indicate that we are not currently affected by that situation. Regarding margins, we are pleased with our current outlook, especially considering the investments we’ve made to support growth in Pasewalk and Arouca. The main factor driving our improved margin outlook is stronger revenue growth, which enhances fixed-cost leverage and utilization. Halfway through the year, we are confident that we can achieve the 30% to 30.5% margin range.

Matthew Boss, Analyst

That's great color. Best of luck.

Operator, Operator

Thank you. The next question is coming from Randy Konik from Jefferies. Randy, your line is live.

Randy Konik, Analyst

Yeah, thanks, and good morning, everybody. I guess, Erik, maybe for you. I want to just unpack gross margin a little bit and maybe kind of give us some perspective on additional drivers in the quarter. And then looking ahead, how we should be thinking about the various fluctuations around gross margins in coming quarters? Give us some perspective there. Thanks, guys.

Erik Massmann, CFO

Hi, Randy. Thanks. It's Erik. Overall, I want to mention that gross margin tends to fluctuate from quarter to quarter due to the change in channels and business mix. For instance, a higher B2B revenue, like we experienced in Q2, results in a lower average selling price and consequently a lower gross margin, while the opposite occurs with a higher direct-to-consumer share. Additionally, an increase in B2B share reduces selling distribution costs. This creates a balance, which is why we don't provide guidance on quarterly margins, as they can shift based on timing of orders and shipments. I primarily focus on annual margins and I am confident in our mid to long-term guidance of around 60% gross margin and over 30% EBITDA margin. Regarding the year-over-year decline mentioned, 2024 is undoubtedly a transition year as we made significant investments in our production to meet the demand we anticipate and support long-term growth. This will temporarily cause dilution until we achieve better utilization. However, please keep in mind that we are exercising discipline in our distribution and closely managing our growth to protect our brand equity. Both of these factors contribute to the margin we see this year. Long term, as stated, we are comfortable with our guidance of around 60% gross margin and over 30% EBITDA margin. I hope that answers your question.

Operator, Operator

Thank you. And the next question is coming from Dana Telsey from Telsey Group. Dana, your line is live.

Dana Telsey, Analyst

Hi, good morning, everyone, and I'm glad to see the progress. I have two questions. First, regarding retail store performance, are you seeing any differences by region? Also, for the new locations you're planning, how are you considering store size and the contribution to direct-to-consumer retail sales? Lastly, do you have any updates on the category expansions you’re working on, particularly in relation to the performance of closed-toe footwear and its potential for other occupational uses? Thank you.

Nico Bouyakhf, President, Europe

Hey, Dana, this is Nico. Thanks a lot for asking the question. I'm going to cover the retail part of your question and then Oliver is going to take over with the closed-toe part of the question. So first of all, we are very pleased to be able to share with you that we are well on track with our global retail expansion. In Q2, we opened six new stores. From last year's Q2, we opened 13 new stores; amongst others, Miami, as you know, in the Design District, Tokyo, two stores and Mumbai also a new store. Every store that we open is performing currently above plan. That's very, very pleasant to see and that's also a testament of the great magnetism that we have as a brand when we open a store. Every store, basically our average payback on CapEx is 12 months to 18 months. So that shows you, it's not a big investment case that we're having here. It's really something that adds to our top line and that adds also to our profitability. What we do see in our stores as well is that we have an over-indexed growth of premium-priced product and an over-indexed growth of closed-toe. So wherever we open a physical connection to our consumers, those categories will benefit. For the remainder of this fiscal year, we plan to open a similar amount of new stores in cities such as Paris and cities such as Shanghai. So again, we are very confident with the outlook on our store expansion plan.

Oliver Reichert, CEO

I'm addressing the part of your question about closed-toe shoes, Dana. The last quarter was mainly focused on sell-through during winter, leading to increased demand for closed-toe styles. Over 50% of our sales came from closed-toe silhouettes, and we experienced a 77% growth in this segment compared to the first two quarters of last year. This shows significant momentum. We previously identified the closed-toe shoe segment as a prime opportunity prior to our IPO, and now it's clear that we have achieved substantial growth. The second quarter will focus on business-to-business sales for our spring-summer season, so we expect to see more open-toe styles in that period. It's also important to note that we are now a year-round brand with strong offerings in closed-toe styles, including clogs, sneakers, and sandals. We've seen average selling prices rise for closed-toe products, which allows for new usage occasions. Our non-sandal sell-through was over 40% this quarter, which is quite impressive.

Dana Telsey, Analyst

Great. Thank you very much.

Oliver Reichert, CEO

Thank you, Dana.

Operator, Operator

Thank you. The next question is coming from Sam Poser from Williams Trading. Sam, your line is live.

Sam Poser, Analyst

Thank you for taking my questions. Good morning. I have two questions. First, can you discuss how the sandal business has changed since the end of the quarter? Second, regarding the gross margin, how long will it take to optimize the new production facilities so that they no longer negatively impact the margins? When can we expect the 220 basis points to be offset by the productivity of those factories and related sales?

Alexander Hoff, VP of Finance

Hi, Sam. Thanks for the question. This is Alexander and I will take the gross margin piece. Actually, what we communicated through the IPO and referring to Erik's statement, clearly '24 is a transitionary year. We took the strategic decision to go with further capacity to meet future demand. We also indicated that we see in '25 a better absorption, but '24 is one year where we will bring over volumes from Gorlitz to Pasewalk, mainly. Pasewalk is the only factory out of our expansion program with Gorlitz and Portugal, which is a complete new factory where we would bring in initial under-absorption overhead and so on. So that will be the heaviest impact in '24 and we expect '25 onwards to see a better absorption and a better impact on the margin side.

David Kahan, President of the Americas

This is David, Sam. Thanks for the question. Just a little color on the breakdown with the sandal business. The momentum in sandals has been incredibly strong both DTC and at wholesale. As a matter of fact, what we're seeing in our core sandal business is not only strong sell-throughs but a transition in penetration, leather versus synthetic. Leather sandals are trending about 68% above last year, while synthetic is 22%. So we're not only seeing the consumers still choose our icons across all the different styles, we're seeing them trade up to more premium versions.

Sam Poser, Analyst

Thank you very much.

Operator, Operator

Thank you. The next question is coming from Simeon Siegel from BMO. Simeon, your line is live.

Simeon Siegel, Analyst

Great. Thanks. Hey, everyone. Really nice job guys. Hope you're all doing well. Oliver, or David or Nico, maybe all of you, just the increased strength you're seeing with those key retailers that you talked about in the prepared remarks, the earlier visibility, it's really all great to see. Can you speak to any changes you're seeing in maybe your discussions with them about the assortment that they're asking for versus your ability to suggest what they should take? I guess I'm just wondering as you continue to innovate your products, do you think you're getting more stronger trust and ability to suggest to them as opposed to them specifically asking for maybe more limited SKUs that have been your hero products historically? Thank you.

David Kahan, President of the Americas

Simeon, great question. This is David. As we've said before, 95% of our growth is coming from existing retail partners. So clearly, the demand is there to expand not only deeper inventory but also the spread of products. As we've said, we allocate everything, every style, every quantity by door, even in people that have chains with hundreds of doors. Everything is allocated to the door level. So the assortments are really vendor-managed. What we're seeing is the momentum in closed-toe and non-sandal products is incredibly strong. So not only are they doubling down on the sandal business, but they're also supporting all of the non-sandal categories. As referenced, we know that the overall wholesale market might be described as being a little choppy. Our sell-through and this is sell-through, not sell-in was up over 30% in the quarter. So obviously, there's a lot of demand to expand our products. And if you've been out at retail, as I know many of you have, you're seeing some of the incredibly strong statements at retail like our 250-year anniversary brought to life in many of the major retail partners.

Simeon Siegel, Analyst

That's great. David, regarding your point about the synthetics, have you noticed a greater frequency of shoppers? Have you seen any differences in how people are purchasing the synthetic option compared to their previous shopping behavior with your product?

David Kahan, President of the Americas

I would say not at all, but many of our consumers appear to be opting for leather as an investment piece. In fact, a pair of Birkenstocks might be the most expensive footwear in many consumers' closets, especially compared to other sneakers. Choosing a leather Birkenstock doesn't exclude synthetic options, as synthetic is also on the rise. I believe the response to leather products as people invest has been positive, with both leather and synthetic options growing. It's not an either-or situation; we are just reaching more consumers.

Operator, Operator

Thank you. And the next question is coming from Mark Altschwager from Baird. Mark, your line is live.

Mark Altschwager, Analyst

Thank you. Congrats on the progress and results here. First, just with Q3 being a bigger DTC quarter, I'm wondering if you can share any color on the momentum you're seeing this spring relative to Q2? And then separately, you mentioned with the spring price increases, you didn't see any impact on demand. Could you speak to how you're thinking about like-for-like price increases in future seasons to offset some of the inflationary cost pressures? Thank you.

Nico Bouyakhf, President, Europe

Hey Mark, this is Nico. Thank you for your question. Regarding the DTC performance in the current trading of Q3, we're seeing continued strong demand and traffic in our stores. The new locations are doing exceptionally well, and there's a lot of excitement surrounding our physical presence. Online, we are also experiencing increased traffic across all regions. However, we still have significant months ahead, as June, July, and August are key DTC months. We're confident but are keenly watching how these upcoming weeks unfold. As for your second question on pricing, in relation to our European pricing adjustments for spring-summer '24, we focused on two categories. For textiles, which is a significant part of our business, we increased prices by 20% RRP, and we also raised prices on Boston products by 15% RRP. Both price adjustments were well received by consumers, with no signs of negative impact on our sell-through. We view pricing as a strategic tool moving forward. Each season, we review our entire line, considering input costs and necessary pricing adjustments due to inflation, while also assessing our brand equity to determine where we can justify increases. That's our approach to pricing.

Alexander Hoff, VP of Finance

Mark, this is Alexander. Just to add on the inflation piece and how it's impacting margin. Standalone Q2, you saw a 100 basis-points net inflation impact going forward. If I look into the third and fourth quarter, but also '25, what we currently see is labor mid-single-digit, going down then in '25 raw materials, low-single-digit percentage. So it's definitely the clear goal that we will offset any kind of inflation on COGS and selling and distribution expenses.

Mark Altschwager, Analyst

Excellent color. Thank you.

Operator, Operator

Thank you. The next question is coming from Sharon Zackfia from William Blair. Sharon, your line is live.

Sharon Zackfia, Analyst

Hi, thank you for taking my question. I'm interested in the strong performance you're experiencing in the US and the expansion of your stores. Are you noticing any changes in the demographics of your US customers, such as income levels, gender, region, or age? Additionally, I would like a similar insight regarding Europe, considering the transformation efforts in that area. Thank you.

David Kahan, President of the Americas

Yeah, thanks for the question, Sharon. This is David. I think you have to just kind of wrap your arms around the fact that this brand has the broadest demographic of any brand on the face of the Europe. When we talk about our addressable market, it really is quite frankly, everybody. We're just reaching new consumers everywhere we look. We're reaching athletes right now when they recover from sports, finding the benefits of the footbed. We're seeing a significant growth right now in the youth market who's basically maybe a little bit tired with athletic footwear over the last couple of seasons and has added Birkenstock to their closet. And just remember, in a lot of those chains that have been predominantly athletic footwear driven, a pair of Birkenstock is an incremental purchase in those stores. So those stores are very keen to add something like Birkenstock to their assortments. So I would say we're growing across all demographics. Most quickly, probably the youth and more sport-oriented consumer, but it's been very, very broad and the growth has been just as strong in some of our old-time heritage brown shoe comfort stores that go back to the early 1970s.

Oliver Reichert, CEO

Thank you, David. And also, Sharon, thank you for your question. I would definitely echo David's point. The beauty of us is you don't lose older customers while you win new customers and younger customers and that's what we see also in Europe. We do see a broader base growth among younger audiences that find us for many reasons, 1774, the Boston, and some great PR executions in Europe. But what happens is they stay with us and they stay with us until the very end. So you don't lose that older customer while you win the younger customer audience.

Erik Massmann, CFO

You can see the growth in our membership program, which has increased by 40%. This is another indication of how vibrant our brand is. The more we engage, the larger our fan base becomes, transcending age, race, and social demographics. About 70% to 80% of our collection is unisex, making us an ideal brand to welcome everyone and provide access to our products. Once customers experience our offerings, they tend to return.

Operator, Operator

Thank you. The next question is coming from Erwan Rambourg from HSBC. Erwan, your line is live.

Erwan Rambourg, Analyst

Hi, there. Hope you can hear me okay? I just wanted to congratulate you on the quarter and the upgrade for the guidance. Two follow-ups. One on the Asian potential, maybe for Klaus or Oliver. It seems that the consumer is under pressure in China for most consumer companies, but it's probably not the case for you. I'm wondering if this is a good time to find prime locations at preferential costs and to build awareness. Do you have a capacity issue in terms of shipping to Asia and particularly China? And maybe can you remind us of what the setup is there in terms of working with a partner or going direct? And then maybe secondly, if you could talk about ASPs, I think David was quite clear on consumers upgrading to leather. You've put through quite a few price increases. If I look at the 23% growth in the quarter, I remember you gave a reference point at the time of the IPO saying that the average payer was reselling at about $90 at the time. Where would we be on that metric today? And if you can maybe split the 23% growth between volume mix increases and price increases, that would be super useful. Thank you.

Oliver Reichert, CEO

So I'm taking this first part of your four parts of your one question. And thank you for the questions. Wisely chosen. So overall, the APMA region is from a geographic point of view, one of our biggest white space opportunities, of course. And as you see in the numbers, we have grown there by 42%. So that's quite a massive growth. And compared to a lot of other brands cooling down in this environment, we are very encouraged. And please keep in mind that this 42% growth is coming with a fully disciplined and highly-engineered distribution model where we don't flood the market and we don't over-push. It's always in a pull mode. We allocate the products and Klaus, who is responsible for the region will give you more in detail about our distribution strategy there and how we execute the engineered distribution in this segment. Klaus?

Klaus Baumann, Chief Sales Officer

Thank you for your question. We are aware of the challenges in China and have been in the market for a long time. Our strategy is based on our experiences in the EU and the US, focusing on a qualitative distribution model that includes a mix of direct-to-consumer and partnerships to balance our territory sizes. We have planned for this allocation in advance, and the situation has improved significantly, benefiting underdeveloped markets without any issues currently.

Erik Massmann, CFO

I would like to address the part of your question regarding ASP. As you know, we do not provide any quarterly guidance. However, as mentioned in Matt's response, we are not observing any significant changes in the trend. We are very pleased with the current trends, but we have five important months ahead of us, which are heavily focused on DTC where visibility is limited. We are currently about halfway through fiscal Q3. Despite the volatile market environment we keep hearing about, we are not encountering any issues that would cause us concern. David, you might want to add something here since ASP is really on the rise.

David Kahan, President of the Americas

I mean, one interesting point on ASP, and it's a good way to look at it is speaking for the US, according to the economic reports from the FDRA, retail prices on footwear are basically up 0.3%. Our ASP is up six-full-percent. So it's a multiple of what's going on in the market. Part of it is mix and part of it is price. But obviously, when you're selling through product at virtually full-price, 90% plus full-price realization, that's where you get the benefit of the ASP because the consumers realize the equity of your brand and they're willing to pay the price. And I think we're proving that right now in this environment.

Erwan Rambourg, Analyst

Super useful. Thank you.

Operator, Operator

Thank you. The next question is coming from Adrien Duverger from Goldman Sachs. Adrien, your line is live.

Adrien Duverger, Analyst

Hey, good morning. Thank you very much for taking my question. I was wondering if you could comment a little bit on the performance of the new product categories and the new products. I'm thinking maybe of some of the sneakers you released and some of the boots and also what would be the impact on ASP from these new releases? Thank you very much.

Oliver Reichert, CEO

So as you can imagine, Adrien, it's a very big push in ASP and in this closed social segment, we talked about the massive growth rates there. And as you know, like ASP right now is like 50% coming from a product mix and 50% is coming from a channel mix. So the product is a key driver for the ASP at the moment, especially in the first half of the year. Again, just keep this in mind and the winter season like the first two quarters are more affected by this sequential in the ASP, but yeah, we're very proud about this growth here because it was pretty strong.

Operator, Operator

Thank you. And the next question is coming from Paul Lejuez from Citibank. Paul, your line is live.

Paul Lejuez, Analyst

Hey, thank you. Can you just go back to the Pasewalk facility. How ramped-up is that facility today? What capacity is it producing at? I'm curious if you could talk about the performance and efficiency relative to your plan and where you expect to be by the end of the year. Also, I think at one point, you said that facility could increase your volumes by 50%. Let me know if I'm remembering that correctly and any update there? And then just last, can you frame the size of some of your larger countries in the APMA region? Thanks, guys.

Oliver Reichert, CEO

I'm taking the first part regarding the Pasewalk facility, which is similar to Arouca, Portugal. We are very pleased with the setup in Pasewalk currently. We plan to grow our production in a disciplined manner moving forward, targeting an overall unit growth of 10% each year, which we are actively pursuing. We're satisfied with the progress in Pasewalk, having already hired the majority of the workforce, which is crucial for us. We're continually enhancing our pre-production operations in Portugal, which will provide us with greater flexibility than before. This is also true for Pasewalk as we focus on the EVA and PU segments, ensuring maximum flexibility in the new factory to support our global growth. We are putting a significant effort into this, and our recent outperformance has led us to raise our guidance. You can expect a shorter timeline for the return on investment curve, as performance has exceeded our expectations. During the roadshow, we discussed the return on investment in 2026 or achieving normalized margin levels, and this timeline will now be shortened due to better-than-expected performance.

Paul Lejuez, Analyst

Thank you.

Operator, Operator

Thank you. The next question is coming from Michael Binetti from Evercore. Michael, your line is live.

Jesalyn Wong, Analyst

Hi, this is Jesalyn Wong on behalf of Michael Binetti. Thanks for taking our questions here. So, Oliver, on the top-five core silhouettes still up over 20% in the quarter, can we talk about how trends were from here and how to sustain that kind of growth? And maybe for Erik or David, in Americas, total DTC is now 29% of penetration. So this quarter the wholesale B2B selling revenues grew roughly about 16% year-on-year, but sell-through to strategic accounts was really high at 33% there. Is that driven by Birk exiting non-strategic accounts? And will we see the sell-in catchup to the sell-through in the third quarter and the fourth quarter? And just curious what was sell-in to strategic accounts relative to the 33% sell-up that the company cited? Thank you.

Oliver Reichert, CEO

I'm addressing the first part of your question. Thank you for bringing it up. We are a purpose-driven brand that remains timeless and transcends fashion. A key indicator of this is that revenue from our five classic silhouettes, which account for about 75% of our business, increased by over 20%. Additionally, the quarter-end average selling price rose by over 10%. This growth in our core business and the improvement in ASP send a strong message to the market about our robust performance. It highlights the company's low fashion risk. We've found that our iconic products still hold significant growth potential as we innovate, adding features like premium leather and distinctive buckles to our hero models. It's crucial to keep these products relevant over time. Our product teams are dedicated to continuously driving trends within the brand. While our established icons continue to perform well, we've also seen remarkable success with new product launches. Whenever we introduce a new item, it's performing excellently in sell-through and sell-out, with sneakers experiencing a 31% increase compared to last year. New styles like Catalina and Lutry are now among our Top 20 styles this quarter. This is truly encouraging, demonstrating our strong connection to the market. Our success is not merely fashion-driven; it stems from being a 250-year-old purpose-driven brand, which confirms that we are effectively executing in the market.

Nico Bouyakhf, President, Europe

Jesalyn, I'll address the second part of your question. This is Nico. We need to distinguish between sell-in and sell-through. What you're seeing now as sell-through with our B2B partners stems from sell-in from previous quarters. This provides clarity on those two figures. As you know, we have undergone a significant transformation in B2B in Europe, which involved terminating relationships with several partners. Distribution is an ongoing process globally, and occasional terminations happen. It's a normal occurrence, but we do not anticipate a major wave of terminations in the B2B sector. We manage our B2B partners very closely, ensuring product allocation and achieving full-price realization that surpasses any other brand. Additionally, we recognize the specific roles our partners play in the marketplace, such as extending reach, providing validation, and authenticating our products. This relationship exceeds mere transactions, and that is how we view B2B.

Operator, Operator

Thank you. And the final question today is coming from Jim Duffy from Stifel. Jim, your line is live.

Jim Duffy, Analyst

Well, thank you. Thanks for squeezing me in. My question builds on some of the comments in your last response. We're very pleased to see the strong uptake of closed-toe and non-sandals. I'm curious, can you speak to the gender mix contribution in the closed-toe adoption and maybe highlight some of the specific styles beyond the Boston that are contributing to that strength?

David Kahan, President of the Americas

Yeah. Hey, Jim, this is David. Yeah, the Boston certainly has led the way, but what we find is just like when Arizona opened up the sandal category to other styles like the Gizeh and the Mayari, the Boston is doing the same thing in clogs. We introduced a style called the Lutry, that's outselling any expectation we could have possibly had for that category. Our other styles like the Tokyo, the Naples, it's like Nico said, anytime we introduce a new style and we bring it, we give it a little oxygen, it really starts to exceed all expectations. Sell-through on our sneakers, speaking for the US sell-through was 31% higher. And what's most interesting is when we talk about like white space categories, you can almost look at men as one big white space that we don't really identify yet, but our men's business is up 45% at retail sell-through versus a year-ago in a market that again is basically flat. So any category, any gender, any segment that we give a little bit more oxygen to with discipline, we start to see the results and the benefits.

Jim Duffy, Analyst

Appreciate it.

Operator, Operator

Thank you. And this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.