2x-ing Alpargatas’ Biz in 3 Steps

TLDR;

- Monthly Budget Targets = financial freedom

- Doubling Alpargatas’ Footwear biz in 5 years

LBAB Community: My Monthly Budget Targets

Every month, I give my family target budgets broken down by category. Each category has a specific spend quota for the month that my wife and I hit. 

Think EOS but for personal finance.

Bi-weekly, I track how we’re pacing and where we need to make adjustments. Our targets look like this:

I ask a few simple questions that dictate our spending behavior:

1. Are we pacing to be over budget in any categories and need to pull back?

2. Are we under budget and have some wiggle room?

3. Is there anywhere we want to pull from to make a big purchase?

It sounds intense and a ton of work, but honestly, locking in spend is 1 of the most freeing activities.

• We know what we’re going to buy.

• We’re confident in our financial situation.

• We know where we can take big swings on big purchases.

The real value: I’m less anxious about money. I have more confidence in making any 1-off purchases because I know we can afford them.

Knowing our spend dictates how much we need to earn. Which has always felt weird. Because usually it’s the opposite.

In America we raise kids with a horrible habit… Your income dictates your spending. 

That always felt like a combo of a rat race and a vicious cycle. 

You spend a fraction of what you earn until your spend grows to = what earn. Then, you need to earn more to cover the increasing spend.

Instead of: 

1. I spend X. 

2. I need to earn Y to cover those costs. 

3. The delta is how much I save.

With that mindset, if I want to adjust my spending, I need to think through how it impacts the rest of my life.

If you want to build this for yourself get access to my P&L Template, it’s free. No strings attached.

Philosophical tangent aside, let’s talk about scooping up Alpargatas to make sure it becomes rich and famous.

Let’s Examine This Biz

Alpargatas, the quiet Brazilian Footwear brand (and owner of Rothy’s), is playing 100-year games, and the market is punishing them for it.

• $1.84/share (-29% over the last 5 years)

• $1.3B market cap

• 1.5x Rev Multiple

The makers of Havaianas and recent acquirer of Rothy’s get no love from public market investors. If they won’t treat them properly. We will.

We’re back with a $1.5B purchase offer to take Alpargatas to a $3B biz.

Financial Summary

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TLDR Analysis: Isn’t as bad as it looks.

• Net Cash from Operating Activities flipped from $166m -> -$65m 🤮

• COGS and OPEX are squeezing the Net Income 😰

• Cash from Loans/Financing went from $7.9m -> $321m 😰/😀

  • Domestic market 70% of Rev (Brazil is growing) while international is shrinking (30% of Rev) 😓

Overall, this is a healthy but slightly struggling biz loaded up on debt and financing to acquire its future. A smart play but an existential bet that puts the biz on a tightrope. Havaianas’ present is funding Rothy’s future.

Specialty Retail and DTC are skyrocketing for Havaianas while the Grocery channel is slowing down. The tide is shifting.

If Havaianas cracks, the whole house comes tumbling down.

Let’s Fix This Biz

Here is my 3-step game plan to ride Alpargatas’ bubbly acquisition into a $3B exit:

1) Sell Less. Profit More. Overseas

There are some fascinating trends hiding in their numbers.

Alpargatas is more profitable:

• Internationally vs. Domestic (Brazil)

• The fewer pairs they sell. 

Alpargatas sells 6.5x more pairs of shoes in Brazil than Intl. But Intl Rev/pair is 2.6x higher than the pairs sold in Brazil.

EBITDA/pair is also 4.3x higher internationally.

Alpargatas saw more Intl EBITDA when they sold fewer pairs and less EBITDA when they sold more.

• In Brazil, when they sold fewer Havaianas YoY 213.6 pairs (-7%), the EBITDA/pair +8% YoY. 

• Vs... Internationally, when the company sold 32.9m pairs (+5%) YoY, the EBITDA/pair fell -> 0.8 (-41% YoY), dragging overall Intl EBITDA -41% YoY.

3 Plays need to happen:

1. Make the brand less accessible in mass channels and more desired in specific channels.

2. Prioritize limited run inventory that’s only available in certain channels at certain times.

3. Increasing drop frequency of new products.

The mix of these 3 plays will have a crucial effect on the biz:

1. Products will be more desired, increasing customer purchasing frequency.

2. Product scarcity -> increased prices and margin.

3. Tighter Ops/less waste from higher product desirability + better demand planning from smaller batch runs.

Pursuing this strategy, especially in Intl markets, will increase the overall profitability of the brand, allow them to pull back on mass manufacturing volume, and reduce overhead/waste through better SC management. Plus, more desired products increase their demands with Retail partners.

Takeaway: Profits are all that matters. Don’t get lost in Topline numbers.

2) The Multi-Brand, Multi-Segment playbook.

This is 1 of my all-time favorite plays. 

With Havaianas + Rothy’s, Alpargatas can run the same playbook in the same markets to 2 separate segments at the same time. 

This is a pro^2 move, my friends.

1. Havaianas is the affordable Mass-Market brand, retailing ~$15-25/pair.

2. Rothy’s is the upscale masstige market brand, retailing ~$100+/pair.

They’ll both: 

• Sell in their own stores, DTC, + select retailers through Alpargatas relationships.

• Share Manufacturing and Supply Chain resources to reduce costs.

• Access even larger financing from the combined biz size.

For all trends, opportunities, and plays that have more downmarket + mass appeal, Havaianas takes the lead. And when they want to go upmarket and focus more on luxury, slap a Rothy’s logo on it.

This has been a successful strategy for Levi’s for almost 50 years. When no one wanted to buy Khakis made by Levi’s, they launched Dockers. The different brands make it easier for customers to buy the product, which counterintuitively strengthens both brands.

Rothy’s is still the younger sibling riding Havaianas coattails today, but don’t be surprised in 3-5 years if Rothy’s is the bigger, more profitable behemoth that elevates the whole biz.

Takeaway: Different Audiences require different brands.

3) Extend the core brands into other Verticals

If Alpargatas really wants to expand into multi-category, they need to use the core brands that customers are already purchasing to expand into new markets. 

Havaianas is in great shape selling 246m pairs of shoes every year. But just for context, Nike sells 780m+ pairs of shoes/yr. Those 780m pairs account for 68% of Nike’s revenue. Apparel accounts for 28%.

I’m not saying that either Alpargatas’ brands should get into Apparel, but what else would their customers buy? Rothy’s has already expanded into Bags & Accessories, and Havaianas has some Clothing & Apparel, but none of the current categories are anything to write home about.

They need to find that next market. 

• The iPhone to their iMac.

• The Yeti Drinkware to their Coolers.
  

Footwear is one of the hardest markets to really nail. No offense to everyone else, but once you really figure out the Ops -> Marketing balance for a footwear brand, other categories are dominatable.

The key will be figuring out what categories make the most sense to move into next. Next, as in, at least several years away. 

There’s a lot of unprofitable growth Alpargatas needs to eat to get Rothy’s close to the 958 DTC stores that Havaianas has. But once they have that footprint and distribution, they’ll need more products to pump through the channel.

Takeaway: Leverage their foothold to extend across categories.

Final Thought

While Alpargatas didn’t go in-depth into Rothy’s numbers, what they did share was telling:

• Rev: $183m

• Net Income: -$36m

• IRL Stores: 16

• Same Store Sales Growth: +19%

• Returning Customer Rev: 49%

First off, Rothy’s is at an impressive Rev scale ($183m), which makes it even more surprising it’s so unprofitable. My biggest question is: how much of those losses are coming from the aggressive Retail expansion? 

Overall, their trend numbers look healthy: same store sales are strong, and customers appear to be returning. There wasn’t a clear metric, but it appears the brand is growing well. Alpargatas also took on enough financing to weather the current storm.

Rothy’s is in the same boat as the other OG DTC brands like Warby, Allbirds, etc. taking on massive losses amid huge retail expansions to get to the promised land: reaping huge, sustained profits.

Looks like Rothy’s brilliant move was finding a safe corp home that would absorb their near-term growing pains + losses and bet on their brighter future… Instead of staying solo and being flogged in the public markets. 

Let’s acquire this biz before it turns highly profitable and capture the upside: we’ll turn Rothy’s into the next luxury Havaianas.

🧠 The Takeaways

The effort to scale 2 brands in the same category with similar customers to meaningful scale shows why aggregators don’t work. The level of depth a brand building requires is unparalleled.

1. Focus more on high price point + high Margin Intl sales.

2. It’s better to have multiple brands to target different segments bit by bit than try to eat an elephant in one bite.

3. Great brands at scale extend outside of their original category.