Adidas Earnings: Tough Year Ahead but Some Signs of Progress

Showing a glimpse of stability after a horrible 2022, narrow-moat Adidas’ ADDYY 2023 first-quarter results slightly outperformed low expectations. However, the firm did not raise guidance for the year, holding to its view that currency-neutral sales will decline at a high-single-digit rate and that its operating loss will be around EUR 700 million (including a EUR 500 million Yeezy write-off). As our estimates are roughly in line with this outlook, we do not expect to make material changes to our fair value estimates of $85/EUR 162 per share. Adidas’ shares have traded below our fair value estimates for most of the past year but now trade at slight premiums after moving up by high-single-digit percentages on the earnings report.

Adidas’ first-quarter sales slid 0.5%, slightly better than the 2.8% decline that we had forecast. Excluding the impact of Yeezy, sales would have been up 9%. The problem areas were North America (22% of the quarter’s sales) and greater China (17% of sales), where sales dropped 20% (down 5% excluding Yeezy) and 9% (flat excluding Yeezy), respectively. In North America, Adidas faced a tough comparison, and the market has been affected by excessive inventories and discounting. In greater China, we believe Adidas has lost share over the past two years but also think it can be regained because of its strong presence in global sports. While the firm is developing plans to recover in these two markets, we do not expect a return to consistent growth until 2024. Meanwhile, in Europe, the Middle East, and Africa (38% of sales), Adidas met our forecast with 4% sales growth.

Affected by higher input costs, discounting, and Yeezy, Adidas’ gross profit dropped about 5 percentage points to 44.8%, but this was in line with our forecast. Its 1% operating margin was better than our negative 2% estimate as its marketing expenses were lower than expected.