Analyst Note| David Swartz |
Narrow-moat Adidas beat our sales and earnings expectations in 2020’s third quarter as 51% e-commerce growth partially offset soft store traffic and wholesale shipments. However, the near-term outlook is cloudy owing to the recent surge of COVID-19 cases in Europe and the United States. Adidas warned that new restrictions and store closures in Europe (about 25% of total revenue) are beginning to impact sales in the region. The firm guided to a low- to mid-single-digit sales decline and EUR 100 million-EUR 200 million in operating income in the fourth quarter, below our prior forecast of a 1% sales decline and operating income of EUR 289 million. Still, we think the underlying business trends are solid and expect improving fundamentals in 2021. We do not expect to make any significant change to our per share fair value estimates of EUR 179/$105 on Adidas and continue to view it as very overvalued. Although Adidas’ shares dropped about 6% on the earnings report, they have been trading near all-time highs.