Adidas AG (ADS.GR) is one of those rare entities: a European company offering solid earnings. Even better, it’s set to profit from the London Olympics.
Athletes begin going for the gold at the London Olympics today – and Adidas AG (ADS.GR) is hoping that there will be a spillover in enthusiasm for the company’s range of athletic shoes and other equipment as fans react by deciding to go out running or taking up other sports themselves. To the extent that effect takes hold, Adidas – an Olympics sponsor – could be raking an entirely different kind of gold, in the shape of higher profits in the coming quarters. The company has a positive Predicted Surprise of 7.8% for the second quarter earnings, which it is scheduled to report next week, on August 2. It’s likely that the company will report earnings that are above the I/B/E/S consensus estimate of 0.73 euros, and to extend that streak of strong earnings reports in the third quarter.
Adidas already is one of those rare European companies that, despite the region’s ongoing economic crisis, actually seems to be firing on all cylinders; it already has seen a boost in sales thanks to June’s Euro Cup 2012 soccer tournament. It actually is faring better than major competitors such as Puma (PUMA.L) and Nike (NKE.N), both of which recently said they are suffering from weakening demand in Europe and China as well as higher raw materials and other costs. Nor is this recent surge in sales and profits going to be a one-time benefit from the Olympics, in the eyes of the company’s management. Adidas CEO Herbert Hainer said a new generation of gym-loving senior citizens, combined with government efforts to combat obesity, should continue to drive earnings well past the Olympics. (For more on this read this Reuters News article.)
Part of Adidas’ success in China is due to its emphasis on franchising. The company’s franchisees are very familiar with local markets, and are well positioned to help Adidas manage its inventory better than would be possible if this task were in the hands of outsiders. During the company’s annual earnings conference call in March, Hainer reiterated that the franchising model was working well in China and that Adidas has “the best sell-through numbers.” Two of China’s biggest retailers, he added, “are earning most of the money with us, and therefore they are willing to expand into further retail stores.” That’s another good sign for future earnings.
Adidas wasn’t immune to higher costs – Robin Stalker, the company’s chief financial officer, during the first quarter earnings conference call in May said that sourcing expenses cut gross margins for the group by 4.7 percentage points during the first quarter. But, he added, the company was able to cut the actual impact on Adidas’s bottom line to only 70 basis points. In contrast, Nike’s operating margins fell by two full percentage points in the same period to 12%, on a trailing four-quarter basis, which contributed to a decline in the company’s return on net operating assets from 49% to 43%. (See the chart below, on the right.) Meanwhile, Adidas boosted its own return on net operating assets to 22% from only 9% previously, and saw its operating profit margin increase to 9% from 5%. True, Adidas’s margins still lag the industry median, but the fact that the company has been able to boost these figures so dramatically in the midst of a challenging environment is impressive.
Adidas’s balance sheet, too, has grown stronger. Over the course of the last year, it has paid down some 30% of its net debt, or about 274 million euros’ worth of long-term borrowings, leaving it with about 640 million euros of net debt. Analysts appear to be taking note of these improved fundamentals, raising their estimates for Adidas’s revenue, EBITDA and earnings per share for the second quarter, 2012 as a whole and the following fiscal year as well. The company’s Analyst Revision Model (ARM) score is 81, putting it in the top quintile for companies in the region. Meanwhile, rival Nike’s ARM score is only 3 – one of the lowest possible rankings – and analysts have been cutting their forecasts on all those financial measures.
Adidas estimate revisions
Nike estimate revisions
So while athletes scoop up their gold medals and attempt to parlay that into higher earnings in the shape of sponsorships and endorsements, Adidas executives seem well positioned to mine the Olympics for a more immediate kind of bottom-line benefit. Even better, the metrics seem to indicate that the company’s earnings are likely to remain higher once the Olympic flame is doused, the flag is pulled down and the athletes fly home again next month.
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