Adidas Earnings: 2024 Guidance Looks Low Given Renewed Momentum; Shares Expensive

Narrow-moat Adidas’ final first-quarter 3.5% sales growth, 51.2% gross margin, and 6.2% operating margin matched the preliminary results that were released on April 16. The firm also held to the full-year guidance that it issued on that date of mid- to high-single-digit currency-neutral sales growth and EUR 700 million in operating profit. While the sales outlook appears reasonable, the profit guidance is very low as it implies an operating margin in the low single digits for the rest of the year. It is true that economic conditions are not ideal, but we think that Adidas is being overly conservative on the near-term outlook considering the popularity of its Terrace styles like Samba and Gazelle and with major sporting events (like the Summer Olympics) and product launches on the horizon. Also, the firm’s guidance assumes that the remaining EUR 200 million in Yeezy inventory is sold at cost even after EUR 150 million in first-quarter sales of the discontinued line yielded EUR 50 million in profit. Thus, we forecast Adidas’ 2024 operating profit at well above company guidance at close to $1 billion (4.3% margin).