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COVID-19 Causes Large Loss for Narrow-Moat Adidas in Q2 but E-Commerce Shines; Shares Overvalued

David Swartz Equity Analyst

Analyst Note

| David Swartz |

Narrow-moat Adidas suffered an operating loss of more than EUR 300 million in the second quarter of 2020 as the pandemic forced most of its worldwide stores and those of its wholesale partners to close temporarily. Yet, while the sales decline of 35% was large, it was not as bad as the 44% drop that we had forecast as e-commerce skyrocketed 93% and mainland China (where most stores reopened by April) sales increased by more than 10% in both May and June. By the end of the quarter, 83% of Adidas’ global stores had reopened, but traffic has remained below normal and there is a risk of more shutdowns. The firm guided to third-quarter operating income of $600-$700 million (a decline of about 28%) on a mid- to high-single digit sales decline, a bit below our prior forecast. We do not expect to make any significant changes to our fair value estimates of EUR 179 per share and $97 per ADR on Adidas and continue to view it as overvalued. While we think activewear demand is relatively healthy and that the Adidas brand remains strong, shares have rallied sharply from March lows.

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Company Profile

Business Description

Adidas designs, develops, produces, and markets athletic and leisure apparel, footwear, accessories, and sports equipment. Its key brands are Adidas and Reebok, and it produces apparel for competitive athletics, casual activewear, and casual fashion. Adidas’ fashion brands include Yeezy and Y-3. Adidas sells its products in more than 160 countries through more than 2,500 owned retail stores, 15,000 mono-branded franchise stores, 150,000 wholesale doors, and more than 50 e-commerce sites. The company was founded in 1949 in Germany.

Adi-Dassler-Strasse 1
Herzogenaurach, 91074, Germany
T +49 9132840
Sector Consumer Cyclical
Industry Footwear & Accessories
Most Recent Earnings Jun 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type
Employees 59,246