The Story

Adidas Stock has been totally crushed since July, losing more than 20%, underperforming the sector.

The down trend was triggered by a profit warning due to Russian Ruble instability and the restructuring of its Golf Brand “Taylor Made”. In particular Ukraine political instability in late summer led to devaluation of the Ruble, which led, together with more currency adverse movements to a 450 million negative impact on Sales (out of 3.4 Billion total sales). Furthermore Restructuring the golf unit will impact around 50-60 million of the Operating Profit of the second half of the year. As a consequence Adidas has decided to reduce its investments in Eastern Europe, opening only 80 stores out of the 150 projected.

Adidas Graph

The 20% down movement in the stock largely discounted these bad news.

On the positive Side, on a currency-neutral base the company enjoyed double digit growth in sales and comparative store sales up 18%. The growth was led by Latin America (for the world cup), but also from a return in momentum in Key markets like US. Western Europe and US combined account for 50% of global sales and their performance has been stronger than expected in the quarter.

Why it is a Buy?

Thanks to its brands, the company has an outstanding 49% gross margin, and revenues are still growing double digit in a slow-growth environment. In a very low rate environment a dividend yield of 2.7% looks appealing, and given a payout ratio of 38% the dividend is there to stay.

Why NOW?

The company has announced a new Buyback program on 1st October for 1.5 billion Euro, partially funded by 1billion debt issued early in October. This kind of strategy is carried out when the management truly believes in the company’s possibilities (see Apple).

The real catalyst for next quarters is going to be the well-known weakness of the Euro, almost ¾ of sales are located outside Euro-Area and that will boost top-line growth. Another evidence of great upside potential for the stock is Nike’s performance, which last month reported strong demand and higher-than-estimates profits.

Most Recently, interest in Adidas’ second brand Rebook, ignited speculation of a spinoff of the two brands.

The date you need to focus on is November 6th, when Q3 earnings will be released.

[edmc id=2029]Download as PDF[/edmc]


2 Comments

AlphaDog · 2 November 2014 at 11:41

Nice article. A have a few questions though:
1. You argue that a key determinant of the profit warning is the slide in the Russian ruble. How exposed is Adidas to Russia, especially in terms of sales? Does the company hedge any of its flows?
2. The article clearly states Adidas as a convenient BUY, especially after the upcoming release of the Q3 earnings. However, I don’t see any limit price or time horizon. I believe that the latter is particularly important in the analysis, as focusing on dividend yield and payout ratio makes sense especially in the long-term. Could you elaborate these topics?
Thank you BSIC

    Article Author · 3 November 2014 at 12:28

    Dear AlphaDog, thank you for your comment.
    1-Adidas does not break down revenues by countries but by regions, hence we only know that Net Sales from European Emerging Markets accounted for E 619 millions or 37% of global net sales. Furthermore from company filings we read that the company has “only a portion” of its sales hedged.
    2-We believe Q3 Earnings will be the trigger catalyst for an up trend that will let the stock outperform the sector. In our view Adidas is a Buy in a 6-12 months time horizon.
    Stay tuned as more news come in. Our coverage on ADS will continue.

Leave a Reply

Your e-mail address will not be published. Required fields are marked *