While some still see an uphill battle for Adidas to regain market share in the competitive landscape, the majority of analysts covering Adidas’ stock were encouraged by the progress the company made in the second quarter toward a turnaround, including building momentum in the underlying business on the back of the “terrace” trend.

Adidas’ second-quarter results aligned with its forecast on July 24, when it raised its guidance for the year due to the positive impact of the first sale of leftover Yeezy inventory and slightly better-than-expected sales and margins for its core Adidas business. Adidas’ full report last week offered additional positive signs.

Highlights of the quarter:

  • Adidas’ revenues declined 5 percent to €5.34 billion, topping analysts consensus target of €5.08 billion;
  • Sales were flat on a currency-neutral basis, reflecting a conservative sell-in approach to reduce high inventory levels, particularly in North America and Greater China. At the same time, Adidas’ initial product drop in June of the remaining Yeezy inventory generated revenues of around €400 million in Q2, largely in line with Yeezy sales generated in the prior year quarter. Excluding Yeezy, currency-neutral sales were down 1 percent;
  • By category, footwear revenues grew 1 percent, reflecting strong growth in football, basketball, tennis, and U.S. sports. Apparel sales declined 3 percent, reflecting overstocking in the marketplace in the category. Accessories grew 8 percent. Lifestyle revenues were down despite strong demand for the company’s Samba, Gazelle and Campus franchises. Performance categories continued to show positive momentum;
  • By channel, wholesale sales declined 10 percent currency-neutral due to efforts to reduce high inventory levels. DTC revenues grew 16 percent versus the prior year with gains of 14 percent in e-commerce and 19 percent in owned stores. The outsized e-commerce performance in part reflects Yeezy sales being sold exclusively through Adidas’ own e-commerce channel;
  • By region, North America declined 16 percent during the quarter, affected by elevated inventory levels in the market and significantly reduced sell-in. On a currency-neutral basis, revenues grew 16 percent in China, 30 percent in Latin America, and 7 percent in Asia-Pacific while declining 1 percent in the EMEA;
  • Gross margin improved 60 basis points to 50.9 percent, mainly due to price increases;
  • Operating expenses increased 3.6 percentage points, reaching 48.3 percent of sales from 44.7 percent a year ago;
  • Operating profit declined 55.1 percent to €176 million. The latest quarter includes extraordinary expenses of €160 million reflecting the one-off costs related to a strategic review as well as donations and accruals for further Yeezy donations. Yeezy product sales positively impacted Adidas’ operating profit by an incremental amount of €150 million;
  • Net income fell 73.3 percent to €96 million, or €0.48 a share, beating €0.47 consensus;
  • Inventories inched up 1 percent on a reported basis with units down 11 percent. Inventories were down, excluding Yeezy. On a currency-neutral basis, inventories grew 6 percent after being up 27 percent at the close of the first quarter and ahead 49 percent at the close of the year;
  • For 2023, currency-neutral revenues are expected to decline at a mid-single-digit rate in 2023, compared to previous guidance of a high-single-digit decline, reflecting the positive impact of the first sale of some of Adidas’ Yeezy inventory and a slightly better-than-expected development of its business in the first half; and
  • For 2023, Adidas now expects a €450 million operating loss in 2023 versus guidance calling for a €700 million loss it had forecast back in March. Including the positive impact from the first Yeezy drop, the potential Yeezy write-off is now €400 million, compared to €500 million previously. The loss also still includes one-off costs related to the strategic review of up to €200 million. Adidas’ underlying operating profit, excluding any one-offs related to Yeezy and the ongoing strategic review, is still anticipated to be around the break-even level.

Shares of Adidas closed Friday at €181.26, up from a close of €172.70 prior to its July 24 pre-announcement. The stock hit a 53-week low of €93.40 last November a few days prior to Adidas’ announcement of Gulden’s hiring as CEO.

The following is a roundup of analysts’ take on the quarter.

Deutsche Bank Research retained its “Buy” rating at a target price of €225. Analyst Adam Cochrane wrote, “2023 is a transition year for Adidas with the sales and profit outturn less relevant than ensuring the product pipeline, marketing plans and corporate structure is ready for the acceleration in growth in 2024 and beyond. The 2Q results highlighted a few incremental positives despite the pre-release last week.”

DB continues to believe the breakeven underlying EBIT guidance for 2023 appears conservative given the potential for brand heat to strengthen in the fourth quarter. Cochrane said the sales contribution from the June Yeezy drop of €400 million was slightly lower than analyst consensus expectations, implying that sales for the underlying Adidas brand were better than expected. He added, “The gross margin control and disciplined sell-in to retailers are a positive and better full-price selling and ability to increase prices signals brand elevation.”

He further noted that inventory, up just 1 percent year over year with units down 11 percent, was also better than his team expected, aided by the Yeezy sales.

Bernstein kept its “Outperform” rating on Adidas while raising its price target to €200 from €190. Analyst Aneesha Sherman wrote, “Adidas H1 results showed the continued progress of the 2023 turnaround: clearing inventory, driving brand heat, regaining share in China, generating cash and investing in retail partnerships.”

Among her takeaways, she noted that first-half results were strong even without the benefit from Yeezy. Sherman wrote, “The lucrative Yeezy launch boosted Q2 EPS, but even underlying results were strong: China growing high-teens and GM (gross margin) +600 bps (basis points) sequentially ex-Yeezy. Yeezy doesn’t impact our underlying view or valuation.”

She said that China is “ramping quickly” for Adidas with inventory rebalanced and sell-in and sell-through improving. On product, she noted that while the trend for low-rise rubber-soled terrace sneakers won’t replace Yeezy, it will help drive brand heat. She further noted that Adidas is back “on the offensive” in running with plans, similar to Nike, to invest in reps in the run specialty channel to win back share from emerging brands.

On the downside, Sherman highlighted that retailers are ordering cautiously overall for the back half of 2023 and that may continue into the first half of 2024 with a focus on chasing demand. The analyst noted, “This will avoid over-supply but also pushes balance sheet risk to the brands, and Adidas will be more nimble on supply chain to rapidly replenish retailer demand as needed.”

Credit Suisse retained its “Underperform” rating while lifting its price target to €130 from €120. “We see few signs of underlying brand momentum with 2Q sales,” analyst Simon Irwin wrote. He noted that sales were flat including Yeezy and down 1 percent excluding Yeezy while underlying EBIT margins were 0.5 percent, excluding the 280 basis points Yeezy benefit.

Irwin noted that performance categories outperformed in the second quarter with notable in strength in global football (soccer), though “weak running performance in what has been a strong market, and little progress in basketball demonstrates the competitive challenges Adidas faces to rebuild distribution and drive brand heat in a fragmenting market.”

On the lifestyle side, offerings appear heavily focused on the terrace trend, but the trend’s momentum will “have to remain strong, and volumes will have to scale substantially” to become a key driver of overall growth. Irwin added, The sale of Yeezy inventory “is going to make underlying trends very hard to read over the next 18 months,” he further added.

On the profit side, Irwin said he’s “cautious about the speed of margin recovery” and also believes gaining expense leverage will be challenging “without low-hanging fruit while reinvesting into the brand.” Finally, he pointed out that while shares of Adidas have about doubled since the announcement of Gulden’s appointment as CEO in November 2022, “valuations already discount a double-digit terminal EBIT margin, which we believe is very challenging.”

Baird kept its “Neutral” rating on Adidas while raising its price target to €170 from €150. Jonathan Komp noted that Q2 results topped low expectations aided by Yeezy and a slightly better underlying performance as the China recovery and better gross margins offset North America challenges. He further noted that management largely held 2023 operating assumptions, while characterizing the implied second-half deceleration as a “worst-case” scenario. Komp added, “While near-term guidance may be viewed as conservative, we still see significant uncertainty to the timing/magnitude of 2024-2025E financial improvements.”

The analyst noted that Adidas’ officials expressed optimism around the retro/terrace footwear trend with additional top-line drivers including a continued focus on performance categories, running and other launches, including the Fear of God collaboration. However, the analyst also noted the Adidas management’s tone was “tempered” in 2024. Komp wrote, “While Adidas expects a better 2024 and profitable 2025/2026, management’s tone when discussing next year was notably tempered by economic uncertainty and wholesale market challenges (Europe and especially North America) plus the time needed to rebuild brand heat and to drive better margin.”

Cowen kept its “Market Perform” rating on Adidas while slightly raising its price target to €164 from €157. Analyst John Kernan said he expected Adidas management to soon raise guidance again as another large drop of Yeezy product is expected to arrive in August. Kernan wrote, “It is difficult to gauge how management will proceed with the Yeezy IP and the brand’s financial impact beyond FY23 but clearly demand for the silhouette remains strong.”

Other positives cited by Cowen included Greater China, where revenues returned the growth of 16 percent on a currency-neutral basis following a 9 percent decline in the first quarter.

The China segment’s EBIT margin also surged over 1,100 basis points year over year against a pandemic-restrictions faced in the year-ago quarter.

Kernan also pointed to growth potential coming from the terrace franchise with the Samba, Gazelle and Spezial, along with the introduction of Jerry Lorenzo’s Fear Of God line, scaling in the second half of 2023 and into 2024. Kernan wrote, “Upcoming launches within the lifestyle of Campus, Black/White Superstar and 70s Running will build upon these releases with second waves in FY24.”

UBS reiterated its “Buy” rating at a €216 price target. Analyst Zuzanna Pusz said Adidas officials on the quarterly call confirmed overall improving momentum for the Adidas brand, including sequential acceleration of its retail business to 19 percent growth in the second quarter from 11 percent in the first quarter.

She said Adidas is seeing stronger-than-expected momentum around the terrace trend with styles such as the Samba, Gazelle and Spezial still low as a percent of volume but having the potential to exceed the 10 to 15 million pairs level. Pusz added, “In addition, the company is to launch the 70s Running style to the offering, with the Superstar to follow as a potential popular style. Despite a tougher backdrop in markets such as the U.S., trends across the board remain healthy.”

Pusz added that Adidas achieved a “solid underlying” margin of 48.9 percent in the second quarter, excluding a benefit from Yeezy sales, with full-price sales coming in better than plan. Pusz further noted that Harm Ohlmeyer implied a 48.5 percent gross margin “could be a good indication” for FY24’s margin while reiterating the company’s expectation for gross margins to exceed 50 percent by FY25 and FY26.

Finally, Pusz said Adidas’ FY23 outlook “remains conservative” with guidance implying a double-digit sales decline and margin pressure in the second half despite the flattish growth in the first quarter and solid underlying GM improvement achieved in the first quarter. The analyst said, “This was explained by the promise that 2023 would be a transition year with no further disappointments, so given the uncertainty in the market, management prefers to remain conservative.”