Chit Chat Stocks - Allbirds (BIRD) | Not So Deep Dive

Episode Date: November 30, 2021

Allbirds is a New Zealand-based footwear and apparel company. Most well known for their footwear, the company offers very minimalist shoes with 14 different styles. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Allbirds. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:09) Industry | (9:53) Management & Ownership | (10:59) Valuation | (14:36) Earnings | (16:31) Balance Sheet | (19:13) Our Analysis | (20:40) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode. We have Brad Freeman on the show today, and we're going to be talking a, I guess, fast-growing brand, one of the fastest-growing

apparel and shoe brands in the world. It's called Allbirds. Brad, this was your choice, and I think you are a owner of some sneakers as along with Ryan. So first off, what's your opinion on the Allbirds brand before we get started here? Yeah. I'm not an extremely fashion forward person. I wear most of the same hoodies that I wore in high school, but these are the most comfortable shoes I've ever worn in my entire life. And we were talking about how they're very versatile. They go with a lot of, I think I'm not very fashion forward, but I think they go with a lot of different things. So I'm a big fan of the shoes and the company did not even pay me to advertise or promote or anything like that. This is all organic. Right. Yeah. We'll get some free

marketing out there. I think Ryan holds the same views. We'll get to that and the anecdotal evidence later. And I'm going to let Ryan introduce the company. And it's very interesting history. I see some nice notes he has there. But first, we have to talk about our sponsor, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. So Chris, who is running it, who we've had on the show before and will be on the show in the future, actually talking about Upstart, which little spoiler there, we're going to have that coming out soon. And that's one of his picks from back in the day, or at least a year ago or something around there. He picked it at

$128 a share. He picked Square at $75 a share. Shopify, his first pick ever back in the day was $77 a share. So the track record has been phenomenal. Yeah, there are winners and losers in the portfolio, but overall the portfolio has done phenomenally well, and he does great analysis and write-ups along with it. So if you are into these types of investments, these types of growth stocks, higher risk, high reward, something you want to hold on for the long-term, you want to sign up for potential multi-baggers, go to Seeking Alpha and look for From Growth to Value, Google it or go to at FromValue on Twitter. Make sure to check it out. Also, we should highlight we're running the year-end promotion for 7investing. $50 off your annual subscription with code

chitchat. That'll end with the new year. So get it while you can. If you're thinking of signing up for 7investing, do it now while we have this extended discount. All right, Ryan, why don't you introduce Allbirds? Yeah. So I'll take the first line of their S1, And they say, we make better things in a better way through nature. And I think that might be the vaguest mission statement I've ever seen. I don't know about you guys. I took nothing away from that statement. But basically, they're just a footwear and apparel company.

And it was, the S1's a little strange reading it because there's like a lot of focus on the environmental side and less on the sales side of the business. So that's the core business is that they use sustainable materials to build shoes. And that's really how they got started. And now they're also moving into apparel. And the original shoes were made with Merino wool. I think I'm saying Merino, right? It's either Merino or Merino. And that's just like a certain type of sheep in New Zealand.

And it's kind of a finer wool. It's a little bit thinner. Most people think of wool as like frizzy jackets. It's not really like that. The shoes are well kept, I guess. um and then the shoes are very basic there's no logo on them it's usually just one or two colors it was designed to be sort of minimalist and they they even say they call their design strategy the right amount of nothing um and the shoes are also really comfortable especially the wool ones i

think they were labeled the most comfortable shoe in the world on that or that's uh that was a headline on new york times time magazine or time magazine yeah and then uh also oprah and obama I used to wear them. So they were like big, uh, big advocates for the product. It's gotta be a good investment. Yeah. Um, and so that's, you know, that's most of their, uh, that that's primarily their footwear. And then they, they have 14 different shoe styles. I believe it's 14. It could be more than that. There's like derivatives off basically the exact same shoe type that they might classify in there, but, uh, there's over 50 different products across footwear and apparel. And so the other apparel offerings, you can basically group them into two different groups.

So lifestyle and performance. So some are meant for more casual wear. Think like button up short sleeve t-shirts, kind of like camp t-shirts, the kind of thing. And then there's like athletic shorts, their socks. They have plenty of different stuff. And then there are also a B Corp, which Brad, I guess you have experience investing in a B Corp. Do you know the differences between that and the general corporate structure? So the taxation is a little bit less efficient as a B Corp versus an S Corp. So that's a drawback.

It's really a promotional tactic for these companies. There's a really strict vetting process that I don't even know what the B Corp board is called, but that they put companies to ensure that they're making an appropriately positive contribution to the world beyond just fattening their pockets with more profits. So Lemonade's a B Corp. That really wasn't any piece of me liking the company uh but but definitely something to keep in mind and and yeah uh taxation a little less appealing with b corp versus escort yeah and they uh they didn't do an initial public offering they did a sustainable public the first sustainable public offer first one these are sustainable dollars not like those initial dollars whatever in an ipo no it's the

same not like your dirty money yeah uh i thought that was funny um but sorry ryan continue that is Yeah, that's a big part of sort of their company ethos and mission is the whole environmental part. So, you know, and part of me felt like that was, I've listened to the founders speak and they are serious about that, but it also sounded like they were just going for ESG funds. Yeah. And that's the brand they're trying to sell to consumers. Yeah. But the history is actually really fascinating. So Timothy Brown, who Brad will talk about in a little bit here, was a soccer player from New Zealand. He went to school at University of Cincinnati, so he came to America for college and he was he played soccer there as well. But afterwards, he was able to join a pro team in New Zealand and he was actually good enough to be on the national team and played in the 2010 World Cup.

They tied Spain for any soccer fanatics out there and Spain won that World Cup. They were actually undefeated and didn't make it out of group play. They tied all three games. So they were the only undefeated team in that World Cup. But anyway, so pro soccer players always get like a month or so off each year. And after the World Cup, Tim Brown used that month to test his design skills that he got while he was studying at Cincinnati. So that was kind of what he majored in.

It's always been sort of a passion of his. And he was also never a big logo guy. So he got a sponsorship when he was an athlete and he didn't really like the idea of wearing logos. He always considered himself sort of a minimalist. So he went to a factory in Indonesia during this month off and he asked them to make a thousand pairs of this basic shoe style, which they still have today. And they did it. And he took those shoes back to his team and he sold them to all of his teammates at full price. I think it

was 120 bucks per pair of shoes. And they all liked them. So by that point, he kind of wanted to do this full time. He was also considering retiring from the team. And so he did, he stepped away. And he started to try to pursue this. Obviously, running a retail business on your own, that size is really, really tough. And so he ended up getting connected with his co-founder, Joseph Zwillinger, I think I'm saying the name right, through their girlfriends. And Zwillinger had sort of background in consulting. And so he was more business savvy. And at one point, Tim was offered a basically funding round from a VC that had a lot of terms and stuff that Tim wasn't super familiar with. So he kind of consulted Joe about this. Like,

do you think this is a good idea? And Joe said, no, here, why don't you let me help you? And they kind of got into this together. And the two of them grew from there. They ran their business on Shopify. And that was all around 2015. So they've gone from that to, we'll talk about this, more than $200 million in sales in the last five years. So I think that's really sort of a testament to how fast companies are able to grow now, thanks to the creator tools. Like think about it. They were able to set up all that

and grow that quickly within five years, all thanks to primarily Shopify, which- I guess, yeah, good time. We just did the show on them. So if you haven't listened to that one, go back and listen to why Shopify has been able to just grow like crazy over the last five years. Yeah, and then they've had plenty of funding around since

and they finally IPO just, it's been less than a month since they've been public. I don't think they've had a public quarter. Nope, it's November 30th. So when you're listening to this, it might be right around that time. But yeah, November 30th, if I remember correctly. So should be soon.

I'll hit industry, competition, Allbirds. This one is going to be simple. It's in the shoe and apparel industry. And it's very easy. Sorry. I should add, there is a, I got a lot of information from the founder's interview with what's his name on how I built this with Guy Raz.

So if you want to hear more of the story, go there. All right. Well, I'll hit industry and competition. Like I said, Shoe and Apparel is easy to quantify worldwide, estimated to be $1.9 trillion in sales in 2020. Allbirds' ambition is to sell into that as much as it possibly can. Competitors include Nike, Adidas. I know some people call it Adidas, as you might be laughing while I call it Adidas, but that's what I've called it my whole life, so I'm going to call it that. there's also Lululemon and then dozens of other companies. I mean, possibly probably hundreds of other companies, maybe even a thousand. There's so many apparel companies and shoe companies out there. For reference, their largest competitor, Nike, had last 12-month revenue of $46 billion.

So when you scale this thing up, if you go worldwide, you can have a lot of sales. And I'll keep that one simple. So Brad, you want to hit management and ownership. Sure thing. So Joseph is Willinger. He's 40 years old. He was the co-founder that Tim brought in to kind of maneuver their way through these VC deals that Ryan was talking about. But he is a former vice president at the industrial products company called Terravia. I don't really know a lot about that company, but it was on his LinkedIn resume, so I added it.

He's also a member of the board of directors at a SPAC called Big Sky Growth Partners. So I guess depending on who you are, you'll view that in a more or less positive light. He has consulted at Deloitte and he was an analyst at Goldman. So that really is where he gets his business acumen from. He's really the business development. And I think he plays a vital role in the engineering and sustainable architecture for the product as well. Yeah, Brian, go ahead. Yeah, so he's worked at sustainable companies in the past prior to joining Allbirds.

they're they were already using the wool for the shoes but now they use a bunch of different materials and so he has a long history right something like that yeah um business side i guess of biotechs oh okay okay yeah continue no good addition and and 70 reviews on glass door 100 rating but only 70 reviews on glass door so take take it with a grain of salt uh timothy brown he i mean he's the brainchild for this idea uh ryan talked a lot about his successful soccer career, which I found pretty cool. He's from New Zealand. He's passionate about wool, I guess. Not a lot to say about him other than his soccer career and his Allbirds project. But he was the former manager in innovation strategy and business development at Red Scout, which I've also never

heard of, which is a brand consulting company. And former, not only was he on the New Zealand World Cup team, but he was a vice captain of the New Zealand World Cup team. So So if you need a bull case, I'm not sure if you need anything else beyond that, but completely kidding. Michael Buffano is the CEO, or I'm sorry, the CFO. He's been there since April 2021, former CFO of Panera. So he really has a lot of great experience. He climbed the ladder for a long time there. And for about a year before he joined Allbirds, he was advising early stage companies. Joe Vernacchio, sorry if I pronounced that incorrectly, he's the COO, former VP of global product at North Face. So perfect experience there, really nice overlap

and former president of Mountain Hardware, which again, great experience, a lot of overlap. So ownership, dual class share structure. Thank you, Allbirds, for only having two classes of shares. This ownership that I'm about to give assumes full exercise of options and it's still before the offering data. So it could have changed a little bit after their IPO. We haven't gotten an annual filing or prospectus. So it could have changed a little bit. But Maveron and Dan Levitan, so I'm sorry if I pronounced those incorrectly. Tiger Global, T. Rowe Price and Fidelity own about 38.3% of the total voting power. That's almost entirely in Class B stock. Joseph owns about 10.3% of the voting power, again, almost entirely in Class B. Same thing with Timothy,

12.3% almost exclusively in class B. Executives together own around 37.4% of the combined voting power. So there's really good, a lot of representation between pre-IPO institutions and executives and insiders. So always like to see that. Yeah, pretty standard ownership structure there. It's not like Dutch Bros when we were covering the past where it was so confusing. Even if it's dual class, this one is very easy to understand. I'll hit valuation quick. It's a simple one. Market cap, $3.5 billion. Ticker is Bird, B-I-R-D. They stole that from the scooter company. So I guess congratulations to them. Price to sales of 14.5, price to gross profit of 27.5. So you might be a bit disappointed in seeing that. I know we all were, but that's kind of how it goes

with the IPO. So you got to know that this valuation is going to be as premium as it gets. and then look, they don't really have any earnings right now. I don't get into what kind of margins they're at and what kind of burn they're at, but given the need for these types of businesses to continually advertise, it's probably important for investors to watch where the operating margin expansion is coming from as Allbird tries to grow its customer base, because they're going to have to spend, you know, they'll probably have a flat GNA spend, or maybe it'll grow a small amount. They're hopefully going to have a bit of a margin expansion from, you know, R&D as a percentage of revenue, which they're actually spending a lot on because they try to do all the tech for

sustainability stuff, and then advertising as a percentage of revenue. You're going to want to see that continually go down as showing that they're making progress here. And then one note, they have 17.9 million outstanding stock options before the IPO. You'll need to watch that as well as their granting pace looks like it definitely presents a headwind for shareholders. No surprise there. The company came out of San Francisco. Those type of companies have more of the culture of granting the stock options, at least anecdotally. I don't have any data around that, but it's not a bad or a good thing.

It's just a way they're financing that business. And let me check how many options are standing, like 140 million. So it's not like they're going to double their share count, but that's how many there were before the IPO. You also may want to check when the new filing comes out, how many of those converted before the IPO. There's all this confusion without the 10Q

were the 10K coming out, like Brad said, but Ryan, do you want to hit earnings? Yeah. So I'll talk to the S1 numbers and then remember that I think new earnings will be coming out right as you're probably listening to this. So you will have a public quarter to look at. But in 2020, they had $219 million in revenue. That was up 13% from 2019, but 74% from 2018. And part of that was impacted. And we'll talk about that. Or maybe I'll just mention it now. So they opened some retail stores. They're trying to do this omni-channel strategy. Most of it still comes from digital, but they opened a lot of those during 2020.

And obviously, there wasn't as much physical retail done in 2020. So physical in-store sales may have been a little depressed. How much of that converted to digital sales instead? It's kind of hard to tell, but in aggregate, there was a 13% growth from 2019 to 2020. So that's, I guess, what you want to look at. And then they have 51.4% gross margins. That was at about 46.9% in 2018. So slight improvement there.

And then 89% of their sales come from their digital channels, or at least in 2020, they did while 11% came from those retail stores. And they've grown their store footprint from three stores in 2018 to 22 by the end of 2020. And I think they're at like 27 now. They have 27 right now. So they are making that a big part of their strategy is to become this omni-channel company and not just be solely digital. And then they aren't profitable. So they've got an operating margin of negative 13% and they spend about 25% of their revenue on marketing. And their adjusted

EBITDA margin is slightly better at around negative 7%. That doesn't convert that well to cashflow though. So I wouldn't put too much emphasis on that number. And then one really interesting point that I saw in their S1, in 2020, 53% of their net sales came from repeat customers that looks really promising and it's a well do you think that's a good or a bad thing well it means you can spend less on marketing for the exit yeah i yeah glass half full that but also glass half empty are they get how many new customers are they're getting that's kind of the that's kind of the thing you got to balance there i don't know what do you guys think on that i mean i like repeat activity i think it's a an overall positive yeah probably yeah i

think i mean if it's a repeat i mean i'm a repeat customer and i guess this is just anecdotal but i i go directly there i don't need if i'm looking for shoes i don't need marketing anymore um and it's kind of stuck in my mind that way do you think if that number continues to grow is that a good thing though if it as long i guess as if overall sales are growing yeah if overall sales are growing at a good rate i guess it's fine um all right balance sheet and liquidity brad what he got for us. It'd almost be interesting to see a net revenue retention rate, which wouldn't make any sense because there's no recurring revenue here. But I mean, that would be so funny if they had something like that to break it out. Cohort analysis could be interesting.

Yeah, that would work. Yeah, that would work well. But balance sheet and liquidity. So they raised about $300 million in their IPO. That added to about $95 million in cash and equivalents on the balance sheet. They have a $40 million credit revolver. They drew down about $14 million of that last year, which carries an interest rate of about LIBOR plus 2.5%. So really, really not bad at all. Not pristine balance. I mean, not a perfect balance sheet, but it's healthy and really no red flags there at all. Yeah. There's no hidden things to watch out. It's all pretty standard. I mean, other than the stock options that you were talking about, that's really the stock. Yeah. The 17.9 million outstanding stock options is really the thing to keep an eye on for balance sheet.

It's more so equity dilution than really high leverage. Yeah, I guess one of the great things about companies that receive a ton of funding rounds as private companies, you don't usually have a lot of outstanding debt by the time you get to the public markets. Yeah. And one thing for a company like this, inventory is definitely important for cash flow conversions. So, I mean, I don't think we have to tell many people about this, but definitely watch the inventory levels quarter to quarter that can really change things.

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either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com okay welcome back next up we have anecdotal evidence both you guys are owners or customers of Allbirds. So Brad, what are your thoughts here? Yeah, their shoes rock. I'll leave it there. All right. Positive. Yeah. Positive for Brad. Ryan, you're very similar, but what do you got? I think their shoes rock too. I am a Revit customer. My brother is as well. If you're wondering, like if you're not a customer and you're wondering what sort of the application is here, like what the most common use case is, it's really, it's like nice casual. But as Brad mentioned earlier it's pretty versatile so you could wear them to work um at most places i imagine

you can wear them to work um you can also wear them out going to lunch you can wear them with shorts you can wear them with pants it you know it really works with a lot of outfits this is almost turning into a dr seuss yeah i uh i don't know like i don't even shop around anymore like i know that once i've kind of worn them out or gotten them dirty like i'll just go back to alberts and buy that same pair of shoes so you're like uh i go directly to their website too i'm not going through any i don't think they have any wholesalers but yeah you can't do anywhere else the uh do you think do you guys this is hard to say it's all anecdotal but do you think there's potential for guys to like this as much as the lululemon diehards that seem to be insane

not well maybe insane might be the wrong word but love to spend a lot at lululemon woman uh typically where their closets are filled with thousands and thousands of dollars worth is there that same potential for the diehards with all birds um do you think makes a fantastic pair actually yeah you were right you were talking about before the show which i agreed with like okay you say you're way more sustainable so shouldn't that mean i'm buying way less things from you and way less frequently so that that's the that's the main headwind that i see on the way up to getting there is that they're like, like we were, what were we talking about? The, the jeans brand Levi's that, that, that kind of talks or kind of pumps up how sustainable their jeans are. And so you

don't need to buy as many of them. And so that's great for the value proposition. We're getting that sale, but when are you going to get that second sale? That that's really the question I have for them on filling out, filling out the closet because the products are awesome. And you have a lot of success so far. Right. That comes back to that repeat customers too. If you're really trying to be sustainable um i would think you'd want that number to go down because you really just want people to buy one one of your products or you can just encourage them to buy the products at the same time that reduces some of the emissions well it's true i guess but i mean it's not common to do that but yeah yeah um i guess my i don't i've never bought anything

from them but it seems like unlike a lot other of the d2c startups that have been out there it seems like it has the potential to reach the top-notch brand status like a nike adidas or Lululemon. Most of them, when people have that aspiration, you kind of look at them, you're like, eh, probably not, but Allbirds definitely could. And those have been, well, I don't know about Adidas, but those have been strong, strong performers over the long term. I'll go a little further on the anecdotal evidence too. With the no logo, it feels like it applies to a lot of people. And they say that they get a lot of word of mouth marketing. I know a lot of brands probably do, but you almost feel like as a customer, you have to, because they're like,

Oh, what shoes are those? Cause no one knows because there's no logo. Well, they got VCs talking at parties. So, you know, that's, that's, that's a big opportunity. However, that may not, that clashes a bit with the data point that you have that only 10% of people are aware of their product. Um, that's a big, something I may talk about in my low lights as well, but we'll save all that rest of that discussion for the end. Um, future growth opportunities. Brad, what do you think? Sure. I think that statistic that we highlighted of their shoes have a 30% lower carbon footprint. I mean, our generation, younger generations go gaga over this ESG sustainability theme and whatever you think

of it, our generations or younger people are very interested in lowering their footprints, their environmental footprints, wherever they can in a really convenient way. We're not actually that dedicated to changing our lives to be we're gonna buy yeah 10 of these and then that'll save right the more you buy these right now this is just a really a really easy way to say i'm i'm a sustainable human being and and still be able to buy shoes so i saw this partnership they they had with the lowest carbon footprint per shoe in association in association with adidas um so that was i mean if you can kind of glom onto them and and and hitch a ride on the adidas bandwagon with these partnerships. I think that could take care of a lot of the brand awareness issues and

the marketing issues that they're having, if they can just lean on Big Brother to do it for them. But yeah, I think their niche is really well placed for what our younger consumers are looking for. Yeah, definitely. The brand awareness stuff that... So they have that kind of nutrition label for the carbon footprint thing that they try to promote. And that type of stuff can really help people signal like what they want other people to think of them we were talking about this too before the show and that's probably an important part because the top apparel and shoe brands of all like of ever nike's the best one they're not really selling like anything special they kind of just advertise that if you wear your shoes you're you're like a great athlete

even for anyone uh so when you wear them you have that feeling and it it seems like all birds needs to capture that same thing, but from a sustainability standpoint, and it sounds like so far, they're really, you know, they're the best at it by far. All right, Ryan, what's your future growth opportunity? Uh, so you, you took the one that I kind of like, I guess, um, doing whatever they can. I don't think they have a whole lot of product expansion, um, capabilities. And so some people might hate that I said that, but I think the apparel initiatives aren't going to go that far for them i think they really are they excel t-shirts are way less profitable than shoes yeah that's what yeah yeah and it's just not that like there isn't that much originality when

when they introduce like the no logo sleek shoe design the right amount of nothing it was kind of it felt like one of the first with shirts there's plenty of like just basic t-shirts and so like it's kind of hard to differentiate i don't know i don't i haven't bought any shirts I'm not huge into their apparel. And so I just don't know if that's going to move the needle for them. So I think really what they have to be doing is just finding as many ways they can to get their shoes in front of all the customers that they can. And so they're spending $50 million in marketing expenses.

That's one way to do it, especially if you turn a lot of those customers into repeat customers. And then store expansions is the other one which Brett talked about. I really do like the omni-channel strategy. And then I guess they might have some pricing power as well. This is sort of a dynamic that Lululemon has thrived on, which is it's almost like a social status thing to wear Lululemon because well,

Nike's the Nike is the original. Yeah. Yeah. Or Nike is that expensive. I don't wear a lot of Nike anymore. Well, I mean, they have all,

they always sell their sneakers for a hundred or whatever. And then Jordan's, which is huge, the high, more expensive they are, more people want them. It's like Ferraris kind of. Yeah.

Just that sort of a dynamic I think could work for them. And right now their shoes are only about, I think it was like 98 bucks. I think once again, it's anecdotal, but I'd be willing to pay more for them. Especially as a repeat customer. I don't mind. Now that again, that makes sense from an investor's perspective. I'm like, wow, that's nice. But from a sustainability perspective, don't you want to be, they talk about being the

low cost producer. they talk about how carbon in the factories yeah like uh if you really are on the sustainability bench and this is great as a consumer or as just a citizen of the world you want these things to be sold for as cheap as possible i don't think they can make like yeah i don't think they can make the shoes i just don't think they have the ability to make the shoes at a carbon net carbon negative or net carbon neutral. But I guess if they just

reinvest the proceeds. I know, but if these are better for the environment, wouldn't you want if their whole goal isn't to make money, but to also save the environment, wouldn't you want to sell as many sneakers as you can instead of Nikes? So raising

prices is counterintuitive to that. Maybe. But as an investor that's like what happened to peloton when they raised prices i well no i'm just saying as an investor that concerns me when i see that you know like if your goal is for sustainability how much are i don't know but maybe they're just doing it for the esg stuff who knows i don't know is that confusing we're like raising prices well yeah obviously obviously But that's if volume shrinks on a price increase. If volume doesn't shrink on a price increase, who cares?

Yeah, but all else equal, volume will increase if prices go down. Yeah, well, you got to manage being a public company. I know, but that's, I mean, that's my concern from an investment perspective. All right. And you don't know that. Think about Peloton. I would say standard demand curves, yeah. Yeah. But they follow that logic a hundred percent, but yeah,

but that most people can't afford that. Most people can't afford $150 shoot. They don't. Yeah. I mean, they target an affluent customer base. So if you want to be fully sustainable price, you're going to have to go down. Not if you want to have a sustainable business. But as an investor price to go up, I mean, I'd be happy. All right. We'll move on. I think it's a simple one. Expanding store count. So easy. I probably stole the easiest one. That's really, I don't know. That's probably the biggest thing

to look out for. They have 27 right now, but they're there. They said they want to get to hundreds and they're getting to the size where it can really be beneficial for driving sales and brand awareness. Uh, I don't know if we mentioned this already, but only 10% of the population knows of Allbirds. So getting these stores out there could be a great way to get that out there as free advertising and also way to sell similar to the Nike store. Everyone knows how good those have done over the long, like, I mean, those things are always crowded and they're huge and it's kind of a big store highlighting all the research and stuff like that and all the different athletes they have but with all birds you can do that highlighting their research and

sustainability um and get more people interested in the brand and kind of being a a fan or a loyal thing so so to speak uh i guess watching that would be a big one but let's move on to highlights and lowlights brad what's your uh what do you like and dislike about all birds yeah so a couple years ago, Allbirds and Amazon kind of got into a fight because Amazon was allowing a ton of knockoffs of Allbirds to be sold on their marketplace. And Allbirds kind of said, sure, you guys, we're not going to sell our products through your platform anymore. So I thought that was a highlight that a company that was three years old at this time thought that they had the cloud, the brand power, the awareness not to use Amazon's marketplace. And I mean,

growth did slow down a lot, a lot this year, but they've compounded pretty successfully since 2016 and they've done it without Amazon. So I think in terms of ceiling for margins, that's a really positive thing for them that they're not relying on these really low margin Amazon marketplace sales to grow. But yeah, in terms of low lights, everyone can access wool in New Zealand. There's not a lot here that that's super unique. So this really is about running as fast as you can to capture the ubiquity, to capture the brand power, and to capture that status symbol that Ryan was talking about as I'm wearing the shoes. So I have a little money in my pocket and I care about the planet. That will take a lot of spending on sales and marketing. And I don't

expect that to slow down at all. So I think profitability is probably a long way off. And I mean, just juxtaposing that with 13% revenue growth and a 15 or whatever it was times sales multiple. Yeah, I'll try not to go into valuation here, but that's where I see the low light. Yeah, I think everyone can, yeah, we can connect. We don't connect the dots there. But that Amazon breakup is definitely a huge highlight for me too. I mean, that shows that not many companies probably could have done that.

All right, Ryan, what do you got? What do you like and dislike? Well, the cohort analysis, they gave some sort of analysis on the cohorts and their existing customers. And that was pretty, it was pretty promising. The 53% of sales coming from repeat customers. I think that once people start to try these shoes on, they tend to like them. They tend to stick with them.

And if that trend persists, the high marketing spend now is worth it because hopefully you don't have to spend as much on those customers moving forward. and it's all right if your customers are repeat customers as long as sales are continuing to increase um and then i like the omni-channel strategy uh also i guess the biggest highlight is that it's uh i really like the product and it's hard to put something it's hard to put context in that and it's hard to frame an investment thesis around that but sometimes you look at a you look at a company say like do people love the product and those tend to end up making really good investments. It feels like one of those. Granted, there's a lot of lowlights as well. So for me,

I'm not really convinced they're able to succeed in apparel and I haven't really seen a whole lot to convince me otherwise. So you're saying succeeding in non-shoes? Yeah. Okay. Which they are making endeavors into that. So that's CapEx wasted, I guess, if it doesn't work out. And then also, I'm not sure how there's sort of this double-edged sword of not having a logo. People like the simplicity, but at the same time, it's easier to replicate. It's so easy. That's my big holdup. The only thing is like- Can people tell the difference?

It hasn't happened yet. Maybe it has, but I haven't noticed any companies succeed copying Allbirds. Remember, $1.9 trillion industry, a lot of white space for these sustainable type things. Are they stealing like, okay, could those Amazon knockoffs steal from Nike? Yeah, I'd say more of a third to Nike or something like that. But I wonder how much of those Amazon knockoffs have taken from potential Allbirds customers. I guess we don't know for sure. The other low light for me is that trends in fashion and apparel tend to ebb and flow.

And if it's just one shoe that's really thriving or like maybe two shoes that are really thriving, what's the durability of the business kind of comes into question. Yeah. And that the durability, I think, and I'm no brand expert, anyone that knows me knows I'm the opposite of a brand expert. But the thing that seems to let companies with these sort of maybe just commodity products that are all driven on a brand is that they really sell some sort of like signaling thing where Nike, like I said before, they're selling, you know, athletic greatness, basically. and all birds could do that maybe with the sustainability thing, but the contrast with the logo, I guess, like, I, I just think like when I'm walking in somewhere, how do I know someone's wearing all birds? Someone could just copy it. Right. Is that, that's my, is that wrong? Or is that, is that right?

I would say that that sounds right in theory, but I, I can notice when people are wearing all birds. I know, but couldn't, could they copy the make it basically the exact same looking shoe? i don't know for me for me personally it's about like how comfortable and easy to put on they are so you'd have to replicate that and and and the style i mean i like the style but i really like how comfortable it is um so i i'm not sure if if cutting input costs um would sacrifice that i i'm not an expert on new zealand wool uh but but yeah that's a good thing to bring up i think

Yeah. And I wonder if someone can copy the comfortability. Maybe it's harder than I'm assuming, but that's my big low light. Let's see. Highlights, loyal customers, as you guys are two examples of. Decent unit economics, I think. They're burning money right now, but it looks pretty good, especially that margin expansion. and there's potentially a long runway for reinvestment if these type of products become wanted by everyone. The glass half full of only 10% of US consumers knowing that Allbirds exists is that there's 90% that could be potential customers and that's a great thing. And I also like management. You guys didn't mention this, but I think you guys probably agree. They seem confident. They don't seem like a crazy Silicon Valley startup people. And it seems like they're focused on the right things. We'll see. It's hard to tell when they just went public. We'll see on some conference calls we'll see in all the filings but i really really liked both of the founders

they seemed like i don't know they just seemed you know normal fine really competent they found the right things um low lights i worry about the path to profitability while growing um as with all these cap apparel companies you have inventory concerns you have r&d spend especially more r&d spend because they're doing so much of the sustainability investments here and then you have the marketing spend that I think Brad was talking about that could stay elevated. And then I don't think there's a true competitive advantage like we mentioned before. Also, I would say if you're interested in this company, definitely read Shoe Dog, which is the Nike autobiography by Phil Knight, who is the founder of Nike. It exemplifies how

precarious these companies can be. They almost collapsed multiple times if they didn't get loans from banks. I mean, Allbirds isn't in that position, but it's a hard, hard business to run. And Nike is a great example of it, but there's a lot of times where that business could have collapsed as well. So it just feels more precarious than I think the valuation comes into or is assuming. But let's move on to bull case and bear case. Brad, what's your bull case for all birds? Yeah. I think they need to find success in other verticals beyond shoes. So t-shirts or shorts or whatever you want to call it. I think that needs to happen. Just again, not to be too redundant, but 13% revenue growth for the multiple that this company is fetching,

it needs to accelerate a lot. So bull case also, this might sound a little weird, is that the pandemic was actually a massive headwind for them. I'm not sure if this was the case. But it was a massive headwind that they're overcoming and growth is going to speed up from 13% to hopefully, ideally somewhere in the compounding at 25% to 30% at least range for the multiples and the margins that this company fetches. I'm not sure how big of a headwind the pandemic was for them. We were kind of debating this before the talk. But I mean, yeah, their brick and mortar stores were definitely hurt. But this is a predominantly digital direct to consumer brand. So I'm just scratching my head at how they have 13% growth in 2020. And the

bull case is that that greatly accelerates because they find more success elsewhere. All right, Ryan. My bull case is that they get acquired. I think it's a logical fit for a bigger retailer to purchase. Most likely, or the most practical fit, in my opinion, would be Lululemon. They're trying to get into shoes merge the men and all bird is all birds is trying to get into clothes and neither of them is doing that well not to mention as a guy i pair the two uh i pair the two brands together all the time and they actually kind of have a lot of resemblances and design like the simplicity and the right amount of nothing strategy so i don't get the right amount

of nothing isn't that just like copyable or maybe it's not i don't know i guess i'm i'm no expert people would have said that about lululemon a long time ago and i mean but hasn't it just that they're selling from lululemon and because there's all those whatever uh lululemon's products that everyone copies all the other companies copies and it's not lululemon's what it looks like it's that lululemon's selling it because it doesn't all those ones all look the same i think no you You can tell, but it's just because they look the same to me, but people, I mean, there, there are logos on Alberts and on Lululemon. It's just not as prominent.

It's not the centerpiece of clothing or shoes. Um, but I, I dunno, an acquisition or at least a merger of some sort seems like a really good fit here, um, outside of an acquisition, it's really hard to rationalize any sort of bull case. They would have to do really, really well in a lot of adjacent markets. And I don't see that happening. I think 15% free cash flow margin feels like the potential ceiling here. They aren't growing sales too quickly.

So to get to $3.5 billion, it's really hard to make the math work here. Yeah. And they're going to have, like I've mentioned twice now, the inventory stuff, plus they're going to be spending a lot on store buildouts that will hurt free cash flow margins as well. And that'll have maintenance capex. It's not software. All right. My bull case is they reach a similar status to the top casual shoe and apparel companies in the world. They probably need to build out about 100 profitable stores in the US and then consistently expand margins as they scale. It's going to be a slow expansion because they do live in the physical world, but you can see that with a lot. But, you know, there are economies of scale here, especially with their more vertically integrated strategy.

So I think that's the path if they stay as a company. The store count or excuse me, the store buildup could be a bit underappreciated and that could be a big bull case. But they're going to really need to execute with that to accelerate growth. Well, I think, yeah, and it's worth mentioning that that will, I think, quickly pick up to probably a quarter of sales coming out of the pandemic. Hopefully, yes. Because it was kind of depressed during 2020 while they were building out all those stores. And they're at, what, 27 stores now? Yeah.

And they said they could get to hundreds. And maybe international expansion is where they have to go to. But that one's a classic. But I think they're already selling internationally. I know. But they have a pretty good presence out there. But if they're going to fulfill this valuation, they're probably going to need to have just growth from there. Yeah, they are selling internationally.

All right. Fair case. Brad, what's your bear case here? Yeah, I think the bear case is that this is a shoe company and we've already seen a lot of signs of them beginning to exhaust the low hanging fruit that they have for growth before reaching profitability, which will make growing profitably even more difficult as I guess the path of resistance becomes higher and higher for higher friction customers that that they haven't yet reached. Um, yeah, I, I think I'll leave it there. Yeah. I mean, that's, that's very, the, the simple one that makes total sense. Uh, Ryan, what's yours? It's the same as

Brad's that they're just a shoe company. I think they're a great shoe company, but that they end up being just a shoe company, uh, in the end and this design and the allure of simplicity and the right amount of nothingness either fades and it's just kind of a fad or gets replicated quickly. Um, I have durability concerns here. Uh, and there's no concerns because the industry will be there. I mean, durability for this business specifically. Right. Right. Brad. Yeah. I remember just, just a case study that I wanted to quickly talk about. I don't know if you guys are familiar with LA gear. Um, but it's, it's like an iconic case study that every single one of my graduate professors loves to teach about, but it was an iconic shoe and fashion company

in the 80s and 90s that just wasn't really able to pivot with the times and match trends and match fads and match patterns. And they just blew up. They completely went to zero. So I want to talk about that because in this industry specifically, tastes change very quickly and management needs to be able to figure out and forecast where those tastes are moving towards. So yeah. Yeah. Difficult task. That's why when looking at companies in kind of a similar regard, like Peloton and Yeti, where you're going off of that consumer brand, it's harder to forecast. And I almost think they deserve a depressed valuation just because of that risk. But mine, similar to you guys, I think if they have no true competitive advantage, it leads to copying

their innovations from other companies. I see no reason why the big companies cannot do this. They may not have the incentive. It could be kind of some sort of counter-positioning or innovative dilemma type deal, although I don't think it's that drastic. And we've talked about this before, but I wouldn't discount how the lack of a logo makes the need for marketing spend to be higher than the competition. I would have known if they had this logo, I would have known that Ryan had those shoes and I'd have been like, oh, I know where to get those now. Those look nice. But I think it's definitely going to be higher. And then I would ask with the brand awareness thing, if only 10% of the US population knows about them, why is that? Is it only because

they've been around for five years that could be true but is it because there's some part of their business that's not leading to getting a full brand of wires across the across the country that would be my big concern and that comes back to the marketing spend um uh you know they can be elevated all right let's wrap things up more or less interested what are we uh brad what are your final thoughts because i love the product so much and because yeah i'm very familiar with what they they do. And I understand the business so well, I'm going to say more interested and less and less interested today and more interested. Um, and I'll be looking to see if I become more interested based on if they find success, um, elsewhere, uh, if their, if their revenue growth

kind of diversifies a little bit, um, that, that would help me become a lot, a lot more interested. And also if this 13% revenue growth, I don't want to keep being a dead horse, but that needs to accelerate so much. And I think they have a chance to do that. It doesn't make sense to me why they slowed down so much in 2020. But if they can speed up and prove that it's a blip, then that brings me back into a more interested frame of mind. And I think stock could struggle to grow into its shoes for a little while. So I think we have time to see if they can prove themselves and to see if that can accelerate. And I think there's going to be a lot more favorable risk reward opportunities on this name in the future with more information. Right. Yeah. I mean, you talked about it a lot,

but it is important. The revenue growth is key. I mean, that's where everything starts. Ryan, what are your final thoughts? Yeah, I'm less interested. I don't tend to, I mean, I hope they stick around because I love buying their shoes, but I think this company should have stayed private. I'm not sure why they're public. And it's a little frustrating because I'm not that good with consumer goods companies anyways. This is probably going to need a 95% drawdown before I'm interested. Yeah. And I think we would all be more interested if the price wasn't so egregious.

I'm less interested, but let me just look at, and I say Nike every time, but that's the easiest example to give because they are the 100 beggar, almost a thousand beggar in or probably definitely a thousand beggar in this industry that is executed. and they basically probably deserve the the top valuation in there and they have the economies of scale already to give them better margins they're trading at a last 12 month eb to sales of six um and that's during the peak of a well maybe at the peak but you know we're at all-time high valuations um they definitely have better sort of capabilities with manufacturers and all that type of stuff to get better margins out there they are also d to c now so there's no difference

between that and all birds. So you look at that, you compare it to all birds valuation. I mean, it's just kind of tough to wrap your brain around. Uh, but that's what it is like with an IPO. So we'll see. Uh, I don't know. I feel like we'd be more interested if the stock, the market cap wasn't. So I don't want to use the word insane, but it's pretty crazy. Insane. Yeah. Yeah. And I mean, I don't know. We're not, IPOs are broken. I think we've talked about this before. IPOs are just they're they're frankly broken and it's making me wait at least six months before after they have the 180 day lockup so i haven't just wait for that yeah it's just that i'm i'm less interested uh what's our stock for two weeks from now yeah it's gonna be i believe it's your pick

it's my pick it's my pick we're gonna do my tech systems uh it's a little bit of a cheat code because we own one of their quasi-competitors. Don't want to disclose that, but it's going to be, I don't know, they're an identity company. They're trying to ride a big tailwind here. Kind of a legacy business. Should be a fun one.

I think I was inspired by seeing a tweet thread on it this morning. So I don't know. The tech system should be a fun one. Sounds good. All right. That's going to do it for this episode. Thank you all for listening.

Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.