June 25, 2019

At Adidas, Popular Products Boost Profits  

by Jharonne Martis.

After years of double-digit revenue growth, Adidas’ revenue growth has fallen to single-digit growth over the past year.  We look at different datasets to get a full picture of the company’s prospects.

Adidas revenue growth slowed to 6.0% last quarter (Exhibit 1). This is a drastic drop from the double-digit growth seen in previous years.  One explanation for the sales slowdown is that the amount of money consumers spent per visit at Adidas has come down in recent years. In 2014, the average spend per record was in the range of $64 – $84. This range has come down to $46 – $65 as of Q1 2019. We discovered this in collaboration with DataLine/Spend Signal, which gives users the ability to ingest raw first party transactional data from offline and online catalog sales at the SKU level.

Exhibit 1: Adidas Revenue Growth YoY% vs. Average Spend Per Record

Source: DataLine/Spend Signal data, available on Battlefin Ensemble Platform

Hot products

Despite the slowdown in revenue, Q2 2019 earnings are expected to rise 16.11% from a year-ago. Demand is building up, and there are two popular product launches that are expected to help Adidas’ bottom line in Q2 2019. The first one being is Yeezy shoes, considered a luxury streetwear sneaker and often sold in limited editions and timely drops. It will be launched around the globe this summer.

Additionally, Adidas’ TOUR360 limited edition golf shoes just became available on its website and was also featured and sold at the U.S. Open in Pebble Beach, Calif.

What’s special is that these golf shoes are made from recycled plastic waste. The recycled materials used to make the upper of the Tour360 XT Parley were gathered from beaches and coastal communities. Adidas worked with Parley for the Oceans—a group working to preserve and protect the oceans—to facilitate the creation of this shoe. Moreover, to help raise brand awareness, Adidas organized the Adidas’ global campaign “Run for the Oceans” in big cities around the world in support of World Oceans Day in June.

Sustainable Brands

Sometimes “recycled” material is still not considered really sustainable. Animal rights organizations such as PETA are critical of materials harmful to the planet – which is a big problem in fashion. PETA in 2017 called Nike’s Flyleather “recycled” leather a scam.

As a result, this has made sports brands try to come across as sustainable, by incorporating an environmental, social and governance (ESG) area on their websites.  They are also discussing this more and more on their earnings calls.

At its annual shareholders meeting in May 2019, Adidas CEO Kasper Bo Rorsted said, “only a few companies are able to embed sustainability authentically into their business model. Adidas is one of these companies as evidenced by the 5 million pairs of shoes we made with Parley Ocean Plastic in 2018, up from 1 million pairs the year before. What’s more, 100% of all cotton used in our products globally was sustainable cotton.” (Source: Adidas AG Annual Shareholders Meeting, 5/09/19).

To evaluate the long-term health of these sport fashion brands in a more holistic way, we turned to our ESG data. This allows us to consider both financial and business sustainability dimensions to evaluate these companies with superior business characteristics, including management, culture and risk profile.

We looked at the leaders in the sports industry known for their sports lifestyle products. All scores are relative percentile rank score, where 100 is considered the best score and zero the worst.

Most of the scores for the sports names are below the top 20%, with the exception of Adidas. This suggests that the other retailers don’t meet the top standards of corporate responsibility and could use better management (Exhibit 2). These companies are less vocal and transparent when it comes to social responsibility, and sometimes even company culture and management. Nike’s ESG Score of 67.06 is at the low end of the group.

Adidas has an 88.69 ESG score, and meets positive standards of corporate responsibility and is best managed within this sector. Therefore, it is also better at anticipating and mitigating risk.

Exhibit 2: Sport Brands ESG Score

Source: Eikon

Brand exclusivity

Adidas limited edition shoes usually build up significant customer demand and are never discounted. This means higher margins and a brand image of exclusivity, especially for its luxury Yeezy shoes. As a result, Adidas has margins that are stronger than the industry average. Last quarter, Adidas operating and net margins were 15% and 11%, above the industry average of 10% and 8%, respectively.

Moreover, looking at the StarMine Earnings Quality model, Adidas scores 100 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow, accruals and operating efficiency components also all look strong. The valuation models suggest that the company might be richly valued, but has the goods to back it up. The StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model suggests credit looks healthy.

Exhibit 3: Adidas StarMine Model Scores

Source: Eikon

Risky business

In general, luxury brands tend to have more demand in China. Geographically, Asia Pacific continues to be Adidas’ strongest driver of revenue, making up 32.6% of its total sales (Exhibit 4). Last fiscal year, Adidas’ Greater China market posted the highest results, and doubled its e-commerce business. As a result, Adidas is also feeling the fears of possible China tariffs. The company warned government officials that proposed tariffs on imported shoes from China would be “catastrophic” for American consumers. This could potentially hurt many retailers, and is the biggest risk to their profits if tariffs are realized in the future.

Exhibit 4: Adidas Revenue % by Segments

Source: Eikon

Return on assets

Adidas continues to see strength and double-digit growth rates with the successful expansion of its business with unique Yeezy models (Source: Adidas annual shareholders meeting, May 2019). It looks like limited-edition shoes, sustainable merchandise and labor actions are all paying off this quarter for Adidas’ bottom line.

Another good sign of good earnings quality can be in its return on net operating assets (RNOA), which is considerably stronger than the consumer discretionary sector as a whole. In the last quarter, RNOA was at 47%, far above the industry mean of 16.9%. That shows that management is efficiently generating returns from its assets which could lead to better earnings in the future.

Exhibit 5: Adidas Return on Net Operating Assets

Source: Eikon

Analysts’ opinions

Finally, analysts polled by Refinitiv expect double digit growth for Adidas’ Q2 bottom line.  The Q2 2019 EPS estimate is $2.27, above last year’s $1.95. What’s more, a number of highly rated StarMine analysts with a strong accuracy rate believe the retailer will beat earnings estimates and post a positive earnings surprise.  Despite Adidas’ revenue slowdown, consumers are still willing and able to pay full price for the brand’s popular merchandise – and that is boosting profits.

Exhibit 6: Adidas Earnings Growth

Source: Eikon




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