Will Allbirds Go Bankrupt?

Allbirds (NASDAQ:BIRD) was once among the most promising up-and-coming shoe brands on the market. At its highest point in late 2021, the stock closed at nearly $29 per share.

Today, BIRD shares have fallen into penny stock territory, commanding a price of just $0.63. What went wrong with Allbirds, and will the company’s difficulties ultimately end with bankruptcy proceedings?

Allbirds Is Losing Money and Drawing Down Cash

The most glaring problem Allbirds faces is its very high rate of losses. Over the trailing 12-month period, the company reported a loss of $152.5 million on sales of $254.1 million. This translated to a net margin of -60.5%. At this level, the company’s losses seem unsustainable.

Even worse for shareholders is the fact that the losses have gradually deepened, creating a long-term trend of building financial outflows.

The problem of ongoing losses is compounded by the fact that Allbirds’ revenue is also shrinking. In Q1, revenues dropped by 27.6% year-over-year, making it the sixth consecutive quarter in which revenue has contracted by double-digit amounts.

After such a long and dramatic fall, Allbirds will have a long slog to get back to its previous level of sales.

Another major problem that jumps out about this company is the fact that its losses have caused it to drastically reduce its cash holdings. At the end of 2021, Allbirds had $289 million of cash on hand. As of the most recent reporting, that number had fallen to $102 million.

This drawdown of cash is understandable, but it’s clear that the company won’t be able to continue at this rate indefinitely. At some point, either it will have to reduce its losses or seek additional funding elsewhere, including potentially issuing a secondary offering.

The Problem of Promotional Pricing

Though Allbirds’ problems are wide-ranging, the company has in many ways not helped itself by slashing its prices and putting its products on constant promotional sales.

This move had a certain rationale, as it was intended to draw down excessive inventory levels. However, selling at sharply lower prices has not helped either revenue or earnings advance. It’s also trained consumers to expect sales regularly.

This difficulty was acknowledged by new CEO Joe Vernachio in the most recent earnings call. The company’s plan for 2024 hinges on improving top-line sales and requires a return to full pricing.

Though this move makes sense, consumers may react poorly after the brand has kept its prices so low for so long.

The short-term effect, therefore, could be a continued deterioration of revenues. The company plans to roll out new products to bolster demand for full-price items, but it remains to be seen how successful this strategy will be.

Will Allbirds Go Bankrupt?

There’s no doubt that Allbirds is in a perilous situation but the risks of going bankrupt at this point seem limited. For all of its problems, Allbirds has resisted taking on debt.

While the company does have a rotating credit facility of $50 million, it has no outstanding debt at this time. To enter bankruptcy, Allbirds would have to begin taking on debt and then fail to meet its obligations to its creditors.

If Allbirds continues losing money, though, borrowing may be its only option to continue doing business. With shares already trading well below $1, issuing additional shares to raise capital at this time would likely drive away the company’s shareholders and send stock prices even lower. As such, there could be a longer-term risk of bankruptcy if the company’s growth strategy fails, even if there isn’t one on the immediate horizon.

How Much Further Could Allbirds Stock Fall?

Even though bankruptcy isn’t an immediate concern, the prospects for the business look very poor. As such, it’s likely that the stock price will continue to deteriorate.

It’s entirely possible that BIRD shares could reach $0.50 this year. Breaking that psychological barrier could trigger even further selling, putting BIRD in a position where it’s quite likely to generate continued losses.

Unless Allbirds can significantly turn its business around, there’s a real risk that the stock could essentially fall toward zero. The company plans to become cash flow positive by next year, but hitting this target will require both top-line revenue growth and a paring back of operating costs.

Allbirds can likely only fund its operations out of cash reserves for another 3-4 quarters at its current loss rate, after which it will have to raise capital via taking on debt or even further diluting its shares.

Is There Any Silver Lining?

At the end of the day, the future for Allbirds looks fairly bleak. That isn’t to say, however, that management couldn’t surprise investors.

The company’s strategy at this point is to refocus on shoes and socks, eliminating the other apparel lines that ultimately weren’t popular enough with consumers to justify themselves. By launching new products in its core line, the company hopes to be able to reinvigorate sales and convince consumers to embrace full-priced Allbirds shoes.

In addition to driving sales, management is also attempting to cut costs to stem the rate of losses. To this end, the company expects to close 10-15 retail stores to reduce its costs of doing business. Though potentially a useful move, it’s far from clear that this will translate into meaningful enough savings to help the company find its footing again.

A final remote possibility is that the brand could eventually be acquired by a more successful shoe or clothing company. At this point, no company has publicly expressed an interest in buying out Allbirds. However, there’s always a chance that the company could be turned around by a larger business with more resources and a larger distribution network.

With all of this said, the possible turnaround story is far from certain enough to make Allbirds a buy. Investors who still hold this stock will likely be better off selling it and cutting their losses, even though those losses are already substantial.

There is very little to like about BIRD shares at the moment, and management will have a long way to go to prove that its new strategy can reignite top-line growth and steer the company in the direction of eventual profitability. If there were one saving grace right now it’s that the market capitalization is below the balance sheet cash reserves.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.