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.