S&P Global Ratings raised its debt ratings outlook on Adidas AG to stable from negative due to the company’s stronger-than-expected operating performance and its expectation that the brand’s growth momentum will continue.
S&P also affirmed its ‘A-/A-2′ long- and short-term issuer credit ratings on Adidas.
S&P noted that Adidas’ AG delivered constant currency revenue growth of about 10 percent year on year for the first half of 2024, on the back of positive contribution from all regions, apart from North America, which was down 6 percent. Also, the company improved reported gross margin to 51 percent, up 320 basis points thanks to lower sourcing costs, better mix, and lower promotional activities.
Adidas further updated its guidance for full-year 2024, now expecting a 10 percent revenue increase at constant currency (from high-single-digit previously) and about €1.2 billion reported operating profit (about €1 billion previously).
S&P said in its statement, “We revised the outlook to stable because we expect Adidas will sustain the overall momentum in its underlying operating performance, despite a challenging macroeconomic environment. Based on good operating results for the first half of 2024, the company’s revised guidance, and ongoing market share recovery in some of the group’s key geographic regions, we revised upward our main assumptions on the company’s operating performance. We now expect Adidas to post €23.0 billion-€23.5 billion revenue at end-2024, and €24.0 billion-€24.5 billion for 2025. This is mainly supported by the footwear category’s solid performance (up 17 percent in second-quarter 2024, representing 61 percent of total sales), the direct-to-consumer channel, and a solid order book with wholesale partners (around 60 percent of the group’s overall business). We expect a gradual sequential improvement in North America (Adidas’ second-largest region after Europe) because the group is progressing with its inventory depletion strategy through disciplined sell-in across the wholesale channel, especially in the apparel product category, and the introduction of new products and new partnerships appealing to U.S. consumers.
“The group is expected to continue benefiting from positive consumer demand on Adidas’ established football category, good prospects for the basketball product range, and ongoing growth of footwear product lines, including Samba, Gazelle, Spezial, and Campus. Finally, we understand that Adidas aims to extend the longevity of its franchise products through the launch of new collections and editions to maintain consumer engagement. We consider that this strategy could lead to more sustainable growth and reduce volatility in the product cycles. Our annual organic revenue forecast for 2025 remains unchanged at 3.5 percent-4.0 percent.
“Overall, we noticed that the sportwear industry is showing good resilience, despite some ongoing pressure on consumer confidence, discretionary spending, and persistent inflation. Positively, in almost all markets, promotional activities and the inventory level of finished products in the distribution network have normalized. Moreover, over the medium term, underlying favorable trends–including a surge in popularity of athleisure, health and wellness-focus lifestyles, and rising momentum for women and children sportswear–support the industry.
“We expect Adidas’ credit metrics to strengthen with S&P Global Ratings-adjusted debt to EBITDA easing below 2x by 2025 thanks to strong EBITDA and cash flow. This is an improvement over our previous base case, when we expected adjusted leverage close to 2.5x in 2024 and approaching 2.0x by 2025. This faster deleveraging path, with adjusted leverage approaching 2.0x already in 2024, is driven primarily by our expectation that S&P Global Ratings-adjusted EBITDA margin in 2024 should land within 9.0 percent-10.0 percent, up significantly from 6.7 percent in 2023, due to fewer promotional activities in key markets, higher contribution from new product launches, and a better distribution mix coupled with robust FOCF. These will be partially offset by higher marketing spending expected (on average 12 percent-13 percent on total sales) to support the brand awareness, ongoing wage inflation, and negative foreign exchange effects. Although we note that the industry faces several challenges, such as still-elevated levels of stock in North America, higher competitive pressure from local and new brands, and an uncertain macroeconomic environment, we consider that Adidas is well positioned to continue deleveraging thanks to its prudent stance toward discretionary spending, its increased profitability and cash flow generation, and much lower extraordinary costs than in past years with nonmaterial Yeezy write-offs. We note that the group has successfully executed its inventory depletion of Yeezy products with €550 million worth of sales at the end of third-quarter 2024. We assume that the company will sell its remaining Yeezy stock on average at cost by end-2024, incorporating a contribution of approximately €600 million in sales. Similarly, we do not expect any major write-offs or extraordinary costs related to the sale of these products that could materially affect the group’s profitability.
“Limited capital expenditure (capex) needs and working capital management improvements should translate into €700 million-€900 million of annual free operating cash flow (FOCF) before lease payments over 2024-2025. Adidas has successfully decreased inventory levels by roughly €1 billion (-18 percent) from mid-2023 to mid-2024, thanks to targeted discounting campaigns in high-stock markets, such as North America, and disciplined sell-in across the high-volume wholesale channel, significantly reduced buying volumes, and tactically repurposing existing inventory. We assume that the group will run on healthier levels of inventory by end-2024, given its reinforced focused on improving working capital management with annual working capital outflows of €300 million-€400 million. We expect capex to remain stable at approximately €600 million-€650 million per year over 2024 and 2025 (about 6 percent on total sales). The group is not expecting major capital-intensive investments in the short to medium term, given that the majority of the group’s turnaround following the Yeezy fallout has already been completed. These factors should allow the group to maintain healthy FOCF supporting its deleveraging. Furthermore, we expect dividends of €150 million-€200 million and do not factor in any major share buybacks.
“The company’s existing financial policy supports the current rating, and we do not expect changes to capital allocation. Adidas remains committed to its financial policy of net leverage at 2x or below. In September 2024, the group conducted a bond repayment of €500 million due in 2024 and we do not rule out further repayments in upcoming years. Dividend policy is unchanged, at 30 percent-50 percent of the previous year’s net income, although we could see an increase in shareholder remuneration (via special dividends or share buybacks) if the group’s leverage drops sustainably below 2x. Having said that, we understand that the group’s priority is to continue deleveraging to preserve financial flexibility.
“The stable outlook reflects our view that Adidas’ credit metrics will gradually strengthen with S&P Global Ratings-adjusted debt to EBITDA remaining comfortably below 2.5x over 2024-2026, driven by good business momentum, maintain healthy and sustainable inventory levels, and disciplined financial policy.”
Image courtesy Adidas
