Adidas wins double upgrade at Morgan Stanley, thanks to 'Spezial' and other shoes

By Barbara Kollmeyer

Helped by consumer appetite for lifestyle shoes and a signature basketball sneaker from NBA player Anthony Edwards, Adidas shares have turned into a buy.

That's according to a team of analysts at Morgan Stanley, who lifted their rating two notches to overweight, or bullish, from underweight in a note to clients dated Sunday. Their price target on the stock got a significant bump to EUR235 per share from EUR175 prior.

In Frankfurt, shares (XE:ADS) surged 3.3%, after losses of 6% so far this year and a one-year rise of just 13%. Adidas is not only poised for its first gain in five session, but the best one-day percentage gain since mid November, according to FactSet research.

"Our channel checks point to building positive sentiment and top-line momentum at Adidas. In contrast to our channel checks in January that were still relatively mixed (in particular in the U.S.), our latest round of checks published today point to broad-based positive sentiment building across the Adidas product pipeline," said a team of analysts led by Edouard Aubin.

In particular, the analysts say the sports gear maker's "lifestyle momentum has legs, as the 'fashion pendulum' swings from chunkier basketball shoes to so-called terrace shoes, with the German company's Samba, Gazelle and Spezial product categories set to benefit.

"We were previously skeptical on the power of this trend to meaningfully move the needle at Adidas given its small scale and scarcity model (<1% of sales prior), and were concerned on the sustainability of the fashion trend," said Aubin and the team.

But the recent round checks on retail channels indicated "strong underlying and broadening sellout trends" for Adidas. "Several retailers commented on the ongoing heat of Adidas' terrace shoes, importantly also now including the U.S. where there was previously more skepticism following our last round of channel checks in January," said the analysts.

They praised CEO Bjørn Gulden, now at the helm of the company for 18 months, for quickly scaling the terrace trend, "importantly including clear product segmentation that is enabling it to scale and cascade down price points and the value chain." Management is also continuing to inject that trend with new colors and twists, keeping the hype going, they said.

As for basketball and soccer shoes, trends are also positive, with retail checks showing strong momentum especially for the Anthony Edwards basketball shoe AE1 .

Adidas was recently replaced as the official supplier to Germany's national football team, which will use Nike gear starting in 2027, marking the end of the German company's decadeslong partnership.

Shares of sports gear makers were dented last month when Nike (NKE) reported mixed results, with fiscal third-quarter net income falling 5% due to flat sales and higher costs.

Morgan Stanley analysts also published a note on Puma, dated Monday, lifting their price target to EUR45 from EUR42, but keeping an equal-weight, or neutral rating.

Led by Grace Smalley, the analysts said channel checks on the sportswear maker revealed retailers were "slightly more negatively skewed on Puma's outlook near term." Market share gains in football and basketball were likely to normalize after some strong years, while progress in running and training were in "early innings."

Feedback on the Adidas rival's lifestyle offerings was also mixed and Smalley and her colleagues noted a fairly competitive backdrop, but Puma could do well if the terrace trend becomes more low-profile in 2025. For now, it's a "show-me" story, and Adidas remains their preferred play on sporting goods, said the analysts.

-Barbara Kollmeyer

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04-15-24 0823ET

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