Björn Borg Q4'24: Growth accelerates, but not without trade-offs

Björn Borg delivered weak Q4 earnings due to a lower gross margin and higher operating expenses, which more than offset the benefits of strong revenue growth. The company’s earnings multiples for this year are at the upper end of our acceptable valuation range, with a P/E ratio of approximately 18x and an EV/EBIT of ~14x. At current valuations, we would like to see clearer evidence that the company can successfully expand its footwear category while maintaining solid profitability. Based on our updated estimates, we believe the stock is relatively fairly valued. As a result, we lower our recommendation to Reduce (prev. Accumulate) and adjust our target price to SEK 62 per share, primarily due to revised estimates.

Strong revenue growth comes at a price

Björn Borg’s Q4 revenue increased by approximately 19% year-on-year to 235 MSEK, above our estimates. The important wholesale segment reported strong growth, well above our expectations, primarily due to higher-than-expected sales in the largest market, Sweden. In our view, the positive highlight in the Q4 report was the sports apparel category, which grew by 44% despite tough comparison figures. However, growth does not come without costs, and the company’s profitability was weaker than expected during the quarter. Björn Borg’s Q4 gross margin declined to 53.5%, falling below our estimates. The decrease was primarily due to a shift in the sales mix, with a lower proportion of revenue coming from the higher-margin underwear category and a higher share from lower-margin segments such as sportswear and footwear. Additionally, SG&A (opex) grew in line with revenue, therefore, the company did not benefit from operational leverage despite increased sales. As a result, Q4 EBIT was disappointing, decreasing to 16.8 MSEK (Q4’23: 20.2 MSEK), below our expectations.

We revised our profitability estimates

In our view, future revenue growth will largely depend on Björn Borg successfully leveraging its brand to expand in sports apparel and footwear. While the company has driven strong growth in sports apparel, clearer signs of volume growth in footwear are needed. Although footwear sales increased in 2024, this was mainly due to the takeover of distribution outside Sweden, Denmark, and Finland. In our view, it will take time for Björn Borg to significantly grow footwear sales, as the company needs to improve quality, enhance design, and streamline distribution. Given these factors, and our anticipation of modest growth in the mature underwear category, achieving the 10% annual sales growth target will be difficult. As a result, we are maintaining our revenue estimates, expecting growth of approximately 7–8% in the coming years.

Furthermore, due to the ongoing shift in the sales mix, we believe it will be difficult for the company to significantly exceed its historical gross margins of around 53%, at least in the short to medium term. Additionally, while sales growth provides some operational leverage, continued expansion, particularly in Björn Borg’s e-commerce and the German market, is likely to require additional costs going forward. Given these considerations, we have revised our EBIT estimates downward by approximately 7% over the coming years.

We stand on the sidelines for now

We forecast earnings growth of around 10% in the coming years driven by good revenue growth and a slight margin recovery. We expect Björn Borg to distribute most of its earnings and free cash flow as dividends, resulting in a dividend yield of 6%. However, the share is expensive on an actual earnings basis and in our view, Björn Borg’s expected return is lower than the required return. Additionally, the DCF value is not sufficiently higher than the current share price. As a result, we turn to a Reduce recommendation (prev. Accumulate) with a lower target price of SEK 62 per share (prev. SEK 67), mainly due to lower estimates.