adidas: Big Inventory Problems

seekingalpha10-07

adidas faces significant inventory challenges, exacerbated by the fallout from Kanye West's anti-Semitic remarks and the potential resumption of the US port strike.The company's high forward P/E ratio...

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At midnight on October 1st, the contract between the International Longshoremen's Association  and key ports in the US expired, resulting in about 45,000 dockworkers from Maine all the way to Texas pausing work at key US ports. ILA workers were demanding higher pay and a total ban on the automation of essential machinery like cranes, gates and trucks. Now, the strike has been put on hold till January 15th, with the ILA and its members agreeing to the 62% wage increase. At this point, all bets are off and they could resume their strike. A new strike makes life hard for shoemakers like adidas. While this holiday season is largely safe from disruptions, they are not out of the woods yet. How This Impacts adidas The American Apparel & Footwear Association says ports along the Cast and Gulf Coasts imported more than 40% of all U.S. footwear in 2023. According to the American Apparel & Footwear Association , 4","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","ADDYY":"阿迪达斯","ADDDF":"adidas AG","BK4558":"双十一","BK4202":"服装、服饰与奢侈品"},"translate_title":"阿迪达斯：库存问题大","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ADDDF":0.9,"ADDYY":0.9},"content_text":"adidas faces significant inventory challenges, exacerbated by the fallout from Kanye West's anti-Semitic remarks and the potential resumption of the US port strike.The company's high forward P/E ratio is unjustified given the supply chain risks and margin pressures from excess unsellable inventory.Nike's resurgence and adidas' inventory mismanagement threaten their market position, especially in the critical US wholesale market.I think ADDYY shares are a sell, anticipating a 40% downside to align with realistic earnings expectations.ilbusca Co-Authored By Noah Cox and Brock Heilig Investment Thesis Over the last year, German athletic brand adidas (OTCQX:ADDYY) (OTCQX:ADDDF) has been working hard to combat its surplus inventory, especially after the partnership with rapper Kanye West was severed in the wake of his anti-Semitic remarks in 2022. adidas ending their partnership led to a buildup in the shoemaker's inventory, which is a big problem. This past week, adidas had a near miss, when a port strike among United States Longshoremen workers ended after just 48 hours. Research has shown that for every day the port strike went on, this would result in nearly one week's worth of shipping delays for just under 50% of America's ports. adidas may have dodged a major problem, but this port strike resolution is only temporary. The strike will resume on January 15th. In essence, adidas continues to have the wrong inventory on hand. They need to sell off the product that is now stained with West's anti-Semitic remarks. adidas now faces the challenge of selling excess stock while recalibrating inventory levels for the US market, especially as the looming port strike could resume disruption after the new year. I think the company faces a lot of headwinds, particularly around their inventory. adidas shares look expensive on a forward price-to-earnings ratio given these headwinds. I think shares are a sell. Background On Port Strike (Why Does This Still Matter?) Early Tuesday morning last week, East and Gulf Coast dockworkers went on strike. At midnight on October 1st, the contract between the International Longshoremen's Association (ILA) and key ports in the US expired, resulting in about 45,000 dockworkers from Maine all the way to Texas pausing work at key US ports. ILA workers were demanding higher pay and a total ban on the automation of essential machinery like cranes, gates and trucks. Now, the strike has been put on hold till January 15th, with the ILA and its members agreeing to the 62% wage increase. At this point, all bets are off and they could resume their strike. A new strike makes life hard for shoemakers like adidas. While this holiday season is largely safe from disruptions, they are not out of the woods yet. How This Impacts adidas The American Apparel & Footwear Association says ports along the Cast and Gulf Coasts imported more than 40% of all U.S. footwear in 2023. According to the American Apparel & Footwear Association (AAFA), 40.26 percent of U.S. footwear was imported through the East and Gulf coast ports in 2023, for a total value of $10.5 billion. In the first seven months of 2024, $5 billion worth of shoe imports made its way through these ports, representing 32.04 percent of U.S. imports during that period. With this, and as I mentioned before, adidas simply has the wrong type of inventory in the United States, following the West situation and the breakdown of the Yeezy shoe line. Too many Yeezys were imported to America from China, but they have yet to be bought because of West's comments. This means adidas is paying big money to store these shoes, which very likely may never be sold. To combat this problem, adidas is attempting to reduce its inventory, and according to my research, it is, but it's getting rid of the wrong inventory. This inventory needs to likely be written off. The problem is their revenue channels. For adidas, a big part of their inventory is driven by wholesalers in the space. adidas Earnings Presentation (Seeking Alpha) Globally, 59% of adidas revenue comes from wholesale, meaning they sell their shoes to other stores that then retail them to consumers. When supply chains work great, this is an excellent model for adidas, as it allows them to have a final store assume the risks of turning over the inventory and selling it. Now that 36 ports are at risk of shutting down again in January along the East and Gulf Coasts, imported inventory could slow down drastically, which puts adidas in a very tough position. adidas has to make sure they keep inventory on hand in the US, or else their wholesalers will give space on their shelves to other shoe companies. On the other hand, they already have an overloaded inventory of bad shoes. So if the shoe giant keeps even more inventory on hand, there's a risk that margins compress. Keep in mind, this assumes that the new wage agreement through the ILA will not raise the prices of imported goods (this is fairly likely). I don't see how margins expand from here. Their valuation is really high at this point (compared to other consumer discretionary stocks). Valuation adidas shares trade at over 50 times their forward P/E, with the market betting on the company growing its EPS by 52.71% over the next 12 months. I think inventory will be a deterrent to this. Forward EPS Estimates (Seeking Alpha) Interestingly, this forward PE is way higher than the sector median number of just 17.13. This is a staggering 196.91% premium between the P/E ratio and the sector median. I really think this estimate sets them up to underperform expectations, meaning shares will appear more overvalued on a forward P/E ratio. Based on what's happened with the short-lived port strike, I think there is a very real possibility that adidas is in a lose-lose situation. Because of this, I really think shares need to come down a bit to price in the key supply chain and margin risks in their business model to the US. I think shares should be trading at closer to 30 times forward earnings. This would represent roughly 40% downside for the company. Bull Thesis To be clear, this analysis is more about adidas as a stock and less about adidas as a maker of shoes and athletic products. I think adidas has a strong product lineup (especially after they dropped the Yeezy brand). The company is really firing on all cylinders (for now, on product) and has won over enthusiasts, especially in the racing shoe space. Herein lies the two biggest reasons I do not think the bull thesis will play out. First, is their inventory problem which, I think, is going to lead them to either lower margins or end up short on inventory, leading them to lose space in the wholesale market. The second reason is the potential resurgence of Nike (NKE). Some readers may have noticed that a couple of weeks ago, I wrote on Nike, and I was (and am) very bullish on adidas' competitor. While Nike did withdraw their FY 2025 guidance for earnings last week with the first earnings call after the announcement of their new CEO, Elliot Hill, I still think the company is making the right moves to pick up market share. This hits at the pillar that I think adidas has going best for them: good products. Takeaway No one knows if the resolution to the recent port strike will last past January 15th, but I think it's clear things could get worse for adidas regardless. The sports apparel company is stuck with too much \"bad inventory,\" thanks to anti-Semitic comments from public figure Kanye West. From here, they need to manage good inventory in the US too so they can keep wholesalers stocked, since this is a key part of their business. All the while, Nike (their closest competitor) is staging a comeback. I don't see how any of this justifies the high forward P/E ratio. Shoe importation is going to be a unique (at minimum more expensive) challenge after this strike. I don't see how adidas is set up for success, especially given how these inventory problems affect one of their biggest markets (the US). This puts adidas in a very tough spot. I think shares are a sell.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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