Adidas: Yeezy Clearance Brightens Near-Term Outlook, but Long-Term View Unchanged

Narrow-moat Adidas ADDYY announced preliminary second-quarter results and lifted its full-year guidance after the sale of some of its remaining Yeezy shoes at the end of May. For the quarter (full results will be announced Aug. 3), the firm expects to report EUR 5.343 billion in sales (5% decline) and a 3.3% operating margin. Our forecast, which excluded Yeezy, was for EUR 5.092 billion in sales (9% decline) and a roughly EUR 200 million operating loss. We attribute about EUR 200 million of the EUR 251 million difference in sales to Yeezy, with the rest due to a small outperformance by the rest of the business.

Adidas now expects a full-year currency-neutral sales decline in the mid-single-digit percentage range, up from the high single digits. It also adjusted its potential estimated write-down of Yeezy stock to EUR 400 million from EUR 500 million and its operating loss expectation to EUR 450 million from EUR 700 million (including the previously announced EUR 200 million in costs related to its strategic initiatives). However, this updated guidance is incomplete as it includes the effects of the Yeezy drop in May but does not include any future Yeezy sales. As we believe there is robust demand for the Yeezy footwear (the Financial Times reported more than EUR 500 million in orders in the May offering), it appears likely that Adidas will eventually sell all its remaining Yeezy stock. While the effects of such sales on Adidas’ profitability are unclear (and limited by expected charitable contributions), the proposed EUR 400 million write-down of unsold merchandise will probably not be necessary.

We intend to revise our fair value estimates of EUR 162 per share and $88 per ADR to incorporate the updated guidance.