adidas: Positive Results And Favorable Guidance Are Priced In

seekingalpha07-19

I assign a Hold rating to adidas after assessing its financial performance and valuations.ADDYY's second quarter sales and operating margin were better than what the market had anticipated.But the ...

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Pere_Rubi Elevator Pitch I rate adidas AG (OTCQX:ADDYY) (OTCQX:ADDDF) [ADS:GR] stock as a Hold. My view of adidas is Neutral, taking into consideration both its financial performance and valuations. ADDYY's Q2 2024 revenue and operating profit surpassed the market's expectations, and the company has revised its full-year guidance upwards. But adidas' shares are expensive, as the stock trades at relatively higher multiples as compared to its peers. Therefore, it is reasonable to assign a Hold rating to adidas, as positives have been priced in for this stock. The company's shares can be traded on both the Over-The-Counter market and the Frankfurt Stock Exchange. The three-month mean daily trading values for adidas' OTC shares and Germany-listed shares were $9 million and $100 million (source: S&P Capital IQ), respectively. Readers can deal in adidas' German shares with US stockbrokers such as Interactive Brokers. Company Description Market research firm Euromonitor refers to adidas as the \"top two\" sportswear companies in the world, alongside Nike (NKE). With regards to products, ADDYY derived 57%, 36%, and 7% of its FY 2023 top line from footwear, apparel, and accessories & gear, respectively as disclosed in its annual report. In terms of distribution, the wholesale, own retail, and e-commerce channels contributed 59%, 21%, and 20% of adidas' revenue, respectively for the most recent fiscal year. With respect to geographical mix, the company generated 39% and 25% of its FY 2023 sales from EMEA (Europe, Middle East, and Africa) and North America, respectively. The Greater China, Latin America, and Asia-Pacific markets accounted for the remaining 15%, 11%, and 10%, of adidas' revenue, respectively in 2023. Second Quarter Revenue And Operating Margin Exceeded Expectations ADDYY disclosed the company's preliminary financial results for the second quarter of 2024 this week on July 16. The company only revealed selected financial metrics as part of its preliminary results disclosure, and its full Q2 results will be announced at the end of this month. Nevertheless, adidas' preliminary results release offers critical insights about the company's second quarter performance. Top line for adidas increased by +9.0% YoY from EUR5,343 million for Q2 2023 to EUR5,822 million in the most recent quarter. The company's actual Q2 2024 revenue turned out to be +3.9% higher than the analysts' consensus sales forecast of EUR5,662 million as per S&P Capital IQ data. The company's top-line performance for the latest quarter would have been even better than what headline numbers suggest if one makes certain adjustments. Adjusted for foreign exchange effects, adidas' constant-currency revenue would have grown by +11% YoY instead, as per its disclosures. Also, ADDYY's adjusted constant-currency top-line expansion would have been as good as +16% YoY, if revenue derived from the Yeezy brand wasn't included in both Q2 2023 and Q2 2024. Earlier in October 2022, adidas announced that it \"has taken the decision to terminate the partnership with Ye (music artist) immediately, end production of Yeezy branded products.\" Given that the company intends to clear Yeezy branded inventories \"at cost\", it is fair that the sales relating to the Yeezy brand are excluded from the revenue comparison on an adjusted basis. At the company's prior first quarter earnings briefing on April 30, 2024, adidas highlighted that its adjusted constant-currency top-line growth excluding Yeezy sales was +5% YoY. This implies that ADDYY's revenue expansion on an adjusted basis (excluding foreign exchange effects and Yeezy sales) accelerated significantly from +5% YoY in Q1 2024 to +16% YoY for Q2 2024. On the other hand, adidas' operating income jumped by +96.6% YoY from EUR176 million in the second quarter of 2023 to EUR346 million for Q2 2024. This also means that the company's operating margin improved by +2.6 percentage points YoY from 3.3% for Q2 2023 to 5.9% in the latest quarter. The sell side's consensus operating Q2 2024 margin estimate for adidas was 4.8% (source: S&P Capital IQ) prior to the company's preliminary results announcement. As such, ADDYY's actual second quarter operating margin beat the market's consensus operating profitability projection by a meaningful +1.1 percentage points. There were a number of factors that contributed to ADDYY's improved and better-than-expected operating margin. In its Q2 2024 preliminary financial results announcement, adidas highlighted that its profitability for the recent quarter benefited from \"better sell-throughs, reduced discounting, lower sourcing costs and a more favorable category mix.\" In summary, it is fair to say that adidas' Q2 2024 performance was good, taking into account its revenue growth acceleration and operating margin expansion. Furthermore, the company's top line and operating profitability for the latest quarter surpassed the sell-side analysts' expectations. Prospects Have Become Brighter With Upward Revision In Full-Year Guidance In tandem with its Q2 preliminary results release, adidas provided updates on the company's FY 2024 outlook. In specific terms, ADDYY revised its constant-currency top-line growth guidance for fiscal 2024 from \"a mid- to high-single-digit\" percentage earlier to \"a high-single-digit\" percentage now, as per its preliminary results announcement. At the same time, the company also raised its FY 2024 operating income guidance from EUR700 million to EUR1 billion (versus actual FY 2023 operating profit of EUR268 million). The company specifically highlighted \"the current momentum\" in its preliminary results release as a key factor influencing the change to its full-year financial guidance. In other words, adidas anticipates that its strong Q2 2024 financial performance could be sustained in the second half of this year. I think that this assumption is reasonable, considering the potential positive impact of the Paris Olympics (July 26 to August 11) on sportswear sales. But Stock's Valuations Are Unattractive ADDYY's shares have performed strongly in 2024 thus far, and adidas' current valuations are demanding. This suggests that positives associated with ADDYY's above-expectations Q2 results and the upward revision in 2024 guidance have already been factored into adidas' stock price and valuation metrics. The company's OTC shares (with the ADDYY ticker symbol) and its Germany-listed shares rose by +25.6% and +28.1% (source: S&P Capital), respectively, in 2024 year-to-date. Peer Valuation Comparison For adidas   Stock Consensus Current Fiscal Year EV/EBITDA Valuation Metric Consensus Current Fiscal Year Normalized P/E Valuation Metric   adidas 19.7 times 55.3 times   Nike 17.7 times 23.1 times   PUMA SE (OTCPK:PMMAF) (OTCPK:PUMSY) 6.9 times 21.9 times   Click to enlarge Source: S&P Capital IQ As per the peer valuation comparison table presented above, adidas' valuations are rich in both absolute and relative (compared to peers) terms. In a nutshell, adidas' stock price performance and valuation multiples indicate that the market has sufficiently rewarded the company for its good results and favorable prospects. Final Thoughts My investment rating for adidas is a Hold. ADDYY's Q2 performance was above expectations, but the stock has priced in the strong second quarter results, as evidenced by its demanding valuations.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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