Adidas: Preliminary Results Reflect Yeezy Sales and Improved Profitability; Shares Fairly Valued

Narrow-moat Adidas ADDYY released preliminary third-quarter results that imply higher profitability than we had forecast. After incorporating the announcement into our model, we have revised our fair value estimates to EUR 172/$90 from EUR 170/$93. The reduction in our fair value estimate on Adidas’ ADRs is attributable to the roughly 4% deprecation of the euro versus the U.S. dollar since our last update. The firm will release full results on Nov. 8.

Adidas announced that its third-quarter constant-currency sales rose 1% but fell 6% on a reported basis, slightly below our previous estimate for a 4% drop. We estimate the firm sold about EUR 350 million in Yeezy footwear in the period, in line with our prior forecast. Despite the slight total sales miss, Adidas’ profitability held up better than expected as its gross and operating margins of 49.3% and 6.8%, respectively, beat our prior estimates by 180 and 570 basis points. After adjusting for the early announcement, our EPS estimate for the third quarter rises to EUR 1.43 from EUR 0.06 prior. Further, including roughly EUR 200 million in (previously disclosed) strategic review costs, our adjusted EPS forecast for the full year improves to a loss of EUR 1.05 from a loss of EUR 1.94. However, as has been the case throughout 2023, there is considerable uncertainty in this estimate as it is unknown when or if Adidas will sell its roughly EUR 300 million (at cost) in the remaining Yeezy inventory. Thus far, the company has been successful in selling the discontinued products without difficulty or significant controversy.