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Birkenstock (BIRK -4%) is trading lower today after reporting its Q3 (Jun) results last night. This German footwear company, known for its cork-footbed sandals, reported a slight EPS beat, continuing a trend seen over the past three quarters. Revenue was a bit shy of consensus estimates, growing 12.4% yr/yr to €635 mln on a reported basis. Additionally, revenue growth was its lowest in the last 7 quarters.

• Revenue was impacted by a significant FX-related headwind, which management noted was the largest it has seen since going public. FX caused a 330-bps drag on revenue growth, lowered gross margin by 60 bps, and adjusted EBITDA margin by 70 bps. That said, the company significantly improved its profitability despite the headwind. Gross margin was up 100 bps to 60.5%, and EBITDA margin was up 140 bps to 34.4%, its best third quarter margin, driven by better selling prices and cost absorption related to its facility.
• Management noted that it continues to see a shift towards in-person shopping, which is important as it benefits its B2B channels. B2B was up 15% yr/yr on a reported basis, and BIRK now expects B2B growth to outpace DTC in Q4 (Sep) and for FY25. Notably, within its B2B channel, over 90% of the growth came from existing doors.
• In the Americas, revenue was up 10% yr/yr on a reported basis. Management noted that B2B was particularly strong and, importantly, saw no pushbacks or cancellations following its July 1 price increases. In EMEA, revenue increased 13% yr/yr on a reported basis with its channels both having double digit growth. BIRK noted its online business was slower than planned in April and May, but in June saw a reacceleration. Notably, it saw healthy growth in its own retail, with same-store sales up in the mid-teens. Finally, APAC continues to be its fastest growing region, with 21% yr/yr revenue growth on a reported basis. China was particularly strong, accounting for 20% of APAC revenue. It is important to note that while double-digit growth is encouraging, revenue growth decelerated in every region compared to Q2.
• Regarding tariffs, management said it can manage the baseline 15% EU rate through price actions and other levers, particularly because of its vertical integration. Importantly, the demand in Q3 exceeded BIRK's expectations, and looking ahead, BIRK noted that demand accelerated through July and into the second week of August as back-to-school shopping picks up. This is important as it has not seen a slowdown in consumer demand and is not seeing an impact from its price increases. BIRK, however, does seem to have a capacity issue, noting that it is a current struggle and doesn't always have the capacity to meet demand.

Overall, there are plenty of positives in BIRK's report, including resilient demand despite price increases and encouraging early reads on back-to-school shopping. So why is the stock lower today? Revenue was a bit on the soft side, which is partly due to FX headwinds. Also, BIRK saw a deceleration in growth across the regions it serves. Additionally, while demand remains resilient, we think the capacity constraints could limit BIRK's ability to capitalize on the back-to-school season. Despite these negatives, we're a little surprised the stock is lower on this report because much of the revenue miss was FX-related and its customer held up pretty well considering the macro headwinds.