Adidas shares jumped on Friday after the German sportswear giant presented better-than-expected first-quarter results that showed strong revenue in Europe, Latin America and Asia Pacific, even as leftover Yeezy gear still hangs over the company’s financial performance.
Adidas swung to a €24 million loss after earning €310 million in the prior-year quarter, while revenue edged 0.5% lower to €5.27 billion ($5.81 billion) which was higher than the €5.08 billion analysts expected, according to a FactSet poll. Its operating margin of 1.1% came in ahead of analyst estimates of 0.5%.
Adidas still hasn’t decided what it is going to do with its leftover Yeezy stock, but said it still expects a €500 million ($551 million) operating loss this year if it writes off the inventory designed by rapper Kanye West, whose relationship the company terminated after a string of offensive comments.
Adidas said sales growth excluding Yeezy was 9%.
“Parsing these results for answers is an inherently challenging operation, given industry inventory challenges, Yeezy deconsolidation, and the unwind of supply chain disruption last year,” said James Grzinic, an analyst at Jefferies Equity Analyst.
Nevertheless, Grzinic noted that North America suffered the biggest decline as the region weathered “roughly half the impact” from the Yeezy deconsolidation.
Even excluding Yeezy, North American sales fell 5%.
Grzinic added that though Greater China revenues were still down 9%, its double-digit sell-out growth was “meaningful” and praised the footwear brands “stepped-up approach” to inventory clearance.
Jefferies maintained its hold rating and €150.00 price target.
“The decline in lifestyle and the loss of Yeezy are of course hurting us,” said Adidas CEO Bjørn Gulden in a statement. “But also here we see some positive developments: The Terrace segment is doing very well in all markets and we have started to scale up volumes for our Samba, Gazelle and Campus franchises.”
Zuzanna Pusz, an analyst at UBS with a neutral rating on Adidas and a €156.42 price target, said she expects a positive reaction from investors due to several factors: Adidas’ scale-up operations are a sign of “underlying brand momentum”; better-than-expected Greater China performance; and Adidas’ inventory sell-off being “on track.”
Gulden did say that inventories are still too high, but already €300 million lower than at the beginning of the year.
“We continue to work hard to normalize our inventory levels during the year,” he said.
Meanwhile, RBC Capital Markets analysts were more cautious of the challenges Adidas faces over the next few quarters, namely its product momentum.
“Adidas product momentum has not been strong enough relative to competitors in recent years (even if brand momentum has remained strong) which combined with FX headwinds from strong USD set a challenging landscape for FY23E, in our view,” said Piral Dadhania in a note on Friday.
The RBC team assigned a sector perform rating on Adidas and a €155 price target.
