Bank of America Corp. (BOFA) upgraded Adidas to “Buy” due to its progress in improving margins while lifting its price target on Dick’s Sporting Goods and Academy Sports on improving sales trends.
Analyst David Roux raised his rating on Adidas to “Buy” from “Neutral” and his price target to €235 from €174. In a note, Roux said he saw Adidas’ better-than-expected margins in the second quarter as “the clearest indication yet that the brand is inflecting. This increases our confidence in its turnaround and mid-term earnings potential.”
Roux noted that the underlying gross margin, excluding the impact from Yeezy sales, exceeded consensus expectations by 100 basis points and was down 50 basis points year-over-year, while gross margins from peers were down 150 basis points. Roux further noted that the improving gross margin trend was boosted by full-price sell-throughs “with cyclical tailwinds yet to come.” Better profitability than budgeted “could allow for additional investment into marketing, fueling a virtuous cycle, or drop-through to higher operating margins.”
Regarding top-line growth, Roux said that after losing global market share from 2018 to 2022, Adidas, under the leadership of Bjørn Gulden, is scaling strong demand for its retro Terrace sneaker franchises, similar to a successful strategy Adidas tapped over 2014 and 2015 with Stan Smith and Superstar. The analyst wrote, “We are encouraged by the organic surge in popularity of Terrace styles with consumers and wholesale partners as well as high full-price sell-through. We see these relaunches as a meaningful step in restoring brand heat and regaining market share.”
Also supporting Roux’s upgrade is a more conservative guidance framework by Adidas’ new leadership team, “swiftly improving” inventories and demand recovery for European sportswear in China that he believes could surprise the upside through 2024.
In a separate note, Robby Ohmes raised his price target on Dick’s Sporting Goods to $180 from $170 and his earnings targets while reiterating his “Buy” rating on the stock. He lifted his price target on Academy to $80 from $75 on higher earnings expectations while reiterating his “Buy” rating.
Ohmes raised his second-quarter EPS estimate on Dick’s to $3.83, above the consensus of $3.82, and now expects Q2 same-store sales growth of 4.0 percent versus 2 percent previously. He wrote, “Our estimate is now above consensus of 2.5 percent as Bloomberg Second Measure credit and debit card data for DKS (99 percent correlated with DKS reported same-store sales) implies sequential acceleration in same-store sales versus 1Q given stronger transaction volume, which should help offset slight deceleration in average ticket.”
By month, Ohmes believes Dick’s comps accelerated through the quarter, with July performing the strongest, suggesting momentum ahead of back-to-school selling. The analyst said DKS had some exposure from the resumption of student loan repayments, as 65 percent of its customers have some form of higher education, according to Placer.ai; however, he also believes that given Dick’s higher median household income, it has less exposure versus peers, Hibbett and Academy.
On Academy, Ohmes raised his same-store sales estimate for the second quarter to negative 6.0 percent from negative 10.0 percent. Consensus estimates call for an 8 percent decline.
Ohmes noted that Bloomberg Second Measure credit and debit card data for ASO likewise implies sequential acceleration in the second quarter versus the first quarter. Ohmes wrote, “We expect same-store sales acceleration on higher average ticket, as we believe pressure in seasonal categories incl. pool and patio improved in 2Q given more favorable weather and continued strength in outdoor cooking/grilling, which helped offset more challenging transaction comps as ASO continued to lap customer ammo stock-ups last year.”
Academy’s second-half outlook implies acceleration in same-store sales, with BOFA expecting the retailer to benefit from an acceleration in traffic as ASO moves past ammo headwinds, the launch of new footwear and apparel brands ahead of the third quarter, and improves targeted marketing through a new customer data platform.
Ohmes also said a rebound in U.S. cyclicals could support DKS and ASO.
BOFA recently raised the Consumer Discretionary sector to overweight on a potential shift to “early cycle” amid a “soft-landing scenario” for the economy. Ohmes wrote, “We note that a rebound in Consumer Discretionary valuations could support DKS and ASO, especially as Leisure Brands and Retailers generally outperform in the first year of bull markets.”
Photo courtesy Adidas/Terrace sneaker
