Allbirds plans to go public at a valuation of around $1.6 billion. To judge whether this is a fair price, it’s useful to compare some Allbirds financial metrics to public comparables like Nike, Lululemon, and Crocs. Relevant metrics needed for the assessment enterprise value (EV) and earnings before interest, tax, depreciation, and amortization (EBITDA). The EBITDA for Allbirds is the company’s adjusted EBITDA. 

All monetary values in billions. Data source: DiscoverCI. October 28, 2021.

On an EV-to-Sales (EV/Sales) basis, Allbirds is priced higher than most of its competitors in the table above, aside from Lululemon which has been viewed as overvalued in itself. In order to justify a 7.3x multiple, the company would have to grow at 48% every year for the next five years.  The company’s year-over-year growth was only 13.2% in 2020, so it seems unlikely that it will meet this lofty goal. Furthermore, Allbirds’ EV/EBITDA multiple is extremely high at 106x. Although the shoe industry has a higher average multiple than other consumer goods industries, Allbirds’ multiple is nearly 3x the industry average. Overall, Allbirds is valued unreasonably. The company would need to grow at near unsustainable levels in order to justify such a valuation. 

Allbirds was one of the first shoe and apparel brands to push sustainable sourcing and manufacturing of its products. Today, there are a plethora of current incumbents and new competitors touting many of Allbirds’ principles.   

The global footwear and apparel market is massive. The market was estimated at $1.9 trillion in 2019 with an annual growth rate of 7.48%. Although there is plenty of opportunity for Allbirds to grow, the footwear and apparel market is among the most competitive and fragmented industries. Fortunately for Allbirds, overall market trends are working in its favor. 

A McKinsey survey found that “two-thirds of surveyed consumers state that it has become even more important to limit impacts on climate change.” More than 85% said that pollution reduction should be focused on in the fashion sector. Consumers today expect fashion brands to be at the forefront of social and environmental responsibility. Allbirds as a brand is deeply committed to producing products made from sustainable and recyclable materials. Another McKinsey article found young consumers — Millennials and Gen-Z in particular — are “seriously concerned” about social and environmental causes. Millennials and Gen-Z represent approximately $350 billion of spending in the US alone. Allbirds can potentially capture an outsized portion of that spending with its status as a B Corporation and its narrative of weaving environmental sustainability and fashion together.

The idea for Allbirds began with co-founder and former professional soccer player Tim Brown. Brown received a grant to create a wool sneaker from the New Zealand Wool Industry and launched his idea for a wool sneaker on Kickstarter. Brown then met and partnered with Joey Zwillinger, a renewable materials expert, and started Allbirds in 2016. Two years later, the co-CEOS have led Allbirds to unicorn status with its $1.4 billion valuation.

Allbirds’ board of directors contains a group of independent advisors as well as previous investors. The company’s board is composed of eight board members including co-founders Tim Brown and Joey Zwillinger. Other board members include Neil Blumenthal, Dick Boyce, Mandy Fields, Nancy Green, Dan Levitan, and Emily Weiss. 

Brown and Zwillinger have assembled a strong purpose-driven team committed to Allbirds’ values. Interestingly, Blumenthal is a co-founder of Warby Parker (which went public September 29, 2021), and Emily Weiss is the founder of Glossier. 

The fashion industry was responsible for 4% of global greenhouse gas (GHG) emissions in 2018. Additionally, an estimated 300 million sneakers are thrown out every year. Even more damning is that shoes are typically made of rubber, plastic, and other environment-harming substances. Allbirds set to change that by making shoes out of merino wool, recycled plastic bottles, castor bean oil, and Brazilian sugarcane. Allbirds as a company is deeply committed to environmental, social, and governance (ESG) values. As such, the company became a certified B Corporation in 2016. Today, Allbirds also produces socks, activewear, and more all with the same principles of creating a more eco-friendly brand. 

Unfortunately, Allbirds’ sustainability focus is not a strong differentiator. The fashion industry has very low barriers to entry, and it’s easy for other companies to tout environmentally-friendly goals. Nike and Adidas are among Allbirds’ largeest competitors that now incorporate the same “differentiators.” Rothy’s, Cariuma, and Nothing New are “newer” companies with the same mission and points of “differentiation.” With such intense competition and companies touting similar values, it’s hard to see where Allbirds has a sustainable competitive advantage. 

Allbirds has a strong, purpose-driven mission to create and sell eco-friendly shoes. However, the company simply isn’t differentiated enough in an intensely competitive and fragmented industry. It’s not clear that Allbirds has the staying power to become an iconic brand akin to Nike.

Allbirds’ financials are not trending in the right direction. The company has only managed to grow revenues 13.2% from 2019 to 2020. Operating expenses went up 31.6% in the same period. In other words, the company hasn’t been efficient operationally or in its marketing  efforts. And those expenses aren’t likely to decrease in the future either as Allbirds plans to heavily expand its marketing efforts into TV advertising. It also plans to expand to more than 100 physical retail locations. Lastly, the only profitability ratio the company fares decently in is its gross margins. Allbirds’ margins everywhere else are lower than the industry averages. 

While Allbirds’ financials are not good, the company has at least done a great job building its brand and loyalty as evidenced by its very high Net Promoter Score (NPS) of 86, per the prospectus. Compared to Nike’s 30 and Lululemon’s 46, Allbirds’ has at least built a strong and loyal customer base. NPS will only take a company so far, however, and public markets are not forgiving. Allbirds has a very steep hill to climb in order to reach financials that make it worth investing in.

Allbirds is a very risky investment. Amongst traditional risks like intense competition, Allbirds also suffers from its “minimalist” fashion aesthetic. The lack of branding on its shoes and clothes  puts the company in danger of significant counterfeits. Customers buying counterfeit or “inspired by Allbirds” shoes could harm the brand and its image. 

Additionally, the company’s minimalist aesthetic may not stand the test of time. A company like Nike is able to maintain a strong brand despite it producing many different types of styles. Allbirds, on the other hand, is tied to its minimalist, no-label apparel and hasn’t shown it can jump in and out of fashion trends. 

Finally, Allbirds’ status as a B Corporation differentiates it from its public competitors in Nike, Lululemon, and more. As a B Corporation, Allbirds has legal requirements to balance the financial interests of shareholders with the best interests of all stakeholders, including the public benefit of environmental conservation. These requirements subject the company to sustainability commitments and increased compliance costs. The company’s brand may also be damaged if it fails to reach its sustainability goals. Overall, Allbirds’ fashion aesthetic and status as a B Corporation subject it to unique risks. 

The bearish cases for Allbirds are clear — the company hasn’t shown it can be an enduring fashion brand, it needs to get its financials in order, and it may be subject to additional legal requirements and costs as a B Corporation. Additionally, the company intends to pursue an aggressive brick-and-mortar retail strategy that may increase brand awareness and revenue but will definitely exacerbate the company’s operating and marketing expenses. Allbirds’ operating and marketing expenses are already increasing at a faster rate than revenue. A brick-and-mortar retail strategy will widen expenses with no guarantee of 50% revenue growth (the growth needed to justify Allbirds’ current valuation) for the next five years. 

If all doesn’t go according to plan, Allbirds may be running itself into the ground. An unsuccessful physical store strategy will increase costs and potentially force the company to compromise its values as a sustainable eco-friendly brand.

Allbirds was at the forefront of creating a sustainable and eco-friendly footwear and apparel brand. The company’s commitments to the environment and sustainability is admirable and consumers want more of it. With Millennials continuing to grow in spending power and Gen-Z well on their way, Allbirds has the potential to be the brand that the two generational cohorts resonate with most. 

While a brick-and-mortar retail strategy is an expensive strategy, the company’s bets on physical retail may eventually pay off as it reaches scale. Over time, operational efficiencies will take effect and may be enough to supercharge brand awareness and sales. If successful, the company will have plenty of runway for revenue growth.

Overall, Allbirds must bank on consumer trends towards eco-friendly sustainable brands and people shopping in person in a post-COVID world. While it requires finesse, the company may be successful as the brand defining fashionable sustainability.

Allbirds is a pioneering sustainable footwear and apparel brand. The company has built its brand on minimalist aesthetics and deep commitments to manufacturing eco-friendly apparel. While not disruptive, the company positioned itself as a sustainable brand in an increasingly environmentally-conscious world. 

Unfortunately, Allbirds’ standing as a sustainable brand with a strong DTC business model is not a sustainable competitive advantage. The footwear and apparel industry is one of the most competitive and fragmented industries, and Allbirds’ differentiators are “differentiators” that are shared by many of its competitors. Additionally, the company’s financial position is shaky. It needs to improve its margins across the board while growing revenue at near unsustainable rates. With that in mind, Allbirds may be a disappointing investment opportunity. For these reasons, Allbirds is a Neutral Deal.

For questions regarding the KingsCrowd Analyst Report for this company, please reach out to [email protected].

Analysis written by Francis Vu, October 29, 2021.