UBS raised its rating on Adidas to “Buy” from “Neutral” due to its expectations that renewed momentum in the brand’s lifestyle offerings, particularly the Gazelle and Samba styles, support broader top-line growth.

“The Adidas turnaround story continues to polarize the market, with skeptics believing it may take more time for CEO Gulden to end the period of market share losses,” wrote UBS analyst Zuzanna Pusz. “However, we believe the historical cyclicality of the business, heavily reliant on the fashion cycles of its Lifestyle business, means the brand is entering a period of improving momentum now, with the benefits of the new strategy likely to further accelerate top-line growth from 2024 onwards.”

UBS estimated that the Lifestyle business, Adidas Originals, represents about 40 percent of Adidas’ sales.

“Adidas has historically seen more volatile sales growth versus its peers, which in our view has been largely driven by the ‘halo effect’ of its Lifestyle offering,” said Pusz. She noted that Adidas had seen a positive 3 percent CAGR (compound annual growth rate) since 2018, underperforming the 9 percent CAGR for peers that she primarily traces to a recent lackluster lifestyle performance. However, the analyst said it “feels like 2015 all over again,” the last time Adidas benefited from a favorable fashion cycle driven by strong demand for the Superstar and Stan Smith models. Adidas management cited strength in Gazelle and Samba styles, but, according to UBS, it was also evident with more than a 200 percent Google search.

For the current year, UBS expects to see a 2 percent growth for Adidas versus a 7 percent decline it expected previously. For FY24, UBS sees an acceleration to 10 percent growth when more “more product and wholesale-focused” initiatives are set in place by Bjørn Gulden, who became CEO at the start of 2023 and began to make an impact.

Other factors supporting the upgrade include expectations that margin headwinds impacting the sportswear sector in recent years will be “fading away” due to the resolution of pandemic-related supply-chain disruptions and the boycotts that several Western apparel brands faced in China over past comments over labor conditions in Xinjiang’s Western region. Foreign exchange has also become less of a headwind.

Adidas’ margins have also been impacted heavily by company-specific issues, including weak sales momentum and the loss of the Yeezy franchise, but its move to sell down the remaining Yeezy inventory and expected sales recovery is expected to reverse those margin pressures as well.

Pusz wrote, “The majority of these issues are receding, and we expect brand momentum to start to inflect; the stock offers, in our view, one of the best margin stories in the sector.”

Adidas’ EBIT margin eroded to 3.0 percent in 2022 from the peak of 11.3 percent in 2019. UBS expects Adidas’ EBIT margin to reach 5.2 percent in FY24 and improve to 10.1 percent by FY27, resulting in an estimated positive 42 percent EPS CAGR from FY24 through FY27.

UBS upgraded its price target on Adidas to €216.0 from €148.4 previously. Adidas closed on the Frankfurt Stock Exchange at €176.58 Monday, down €0.30. The stock’s 52-week price range is between €93.40 and €181.88.

Photo courtesy Adidas (shown, Gazelle sneaker)