Local Market Efforts And EVO 1 Launch Will Drive Momentum

Key Takeaways

• Strong brand visibility and high-profile athlete partnerships are driving future revenue growth and improving net margins through demand increases.
  
• Innovative product launches and strategic market operations position Adidas for growth in high-margin sectors, enhancing earnings and market share expansion.
  
• U.S. tariffs may raise costs and strain profit margins, while e-commerce and seasonal fluctuations challenge revenue and earnings stability.

Catalysts

Designs, develops, produces, and markets athletic and sports lifestyle products in Europe, the Middle East, Africa, North America, Greater China, the Asia-Pacific, and Latin America.

• Adidas has been experiencing strong brand heat and successful local market executions, particularly with high-profile athletes like Bad Bunny assisting in sales. This is expected to drive future revenue growth and positively impact net margins due to increased brand visibility and demand.
  
• The company's recent success in major running events and the launch of innovative products, such as the EVO 1 and Pro 4, positions it well to capture growth in the high-margin performance sportswear sector, positively impacting future earnings.
  
• Adidas's strategy to strengthen local market operations, elevate marketing campaigns, and align with consumer preferences should help drive revenue growth and improve overall net margins through targeted approaches and reduced discounting.
  
• The focus on expanding lifestyle running and localizing product offerings to fit regional consumer demands can increase market share and revenue, particularly in emerging markets where growth rates are significant.
  
• The efforts in expanding flagship stores and modernizing store fleet globally can enhance direct-to-consumer sales channels, potentially increasing earnings by diversifying sales presence and reducing reliance on wholesale partners.

adidas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming adidas's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 7.6% in 3 years time.
• Analysts expect earnings to reach €2.3 billion (and earnings per share of €13.14) by about May 2028, up from €756.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.6 billion in earnings, and the most bearish expecting €2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, down from 47.6x today. This future PE is greater than the current PE for the GB Luxury industry at 15.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

adidas Future Earnings Per Share Growth

Risks

• The U.S. tariffs could negatively affect Adidas's financial performance by increasing costs and potentially requiring price increases, which may impact U.S. revenues and profit margins.
  
• Adidas's e-commerce sales were down 3% when including YEEZY, showing a possible gap in digital sales, which could impact overall earnings if not compensated by other channels.
  
• There is uncertainty around the impact of the tariffs on consumer demand in the U.S., which could, in turn, affect revenue and the ability to meet EBIT targets.
  
• Continued reliance on targeted marketing toward localized markets, while beneficial to brand heat, may lead to increased operational costs and could pressure net margins if not managed efficiently.
  
• Current strong demand and high margins may not be sustainable year-round due to seasonal fluctuation and market volatility, potentially leading to lower operating profit in latter quarters, thus affecting overall annual earnings.

Valuation

• The analysts have a consensus price target of €256.553 for adidas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €300.0, and the most bearish reporting a price target of just €181.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €30.8 billion, earnings will come to €2.3 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €201.7, the analyst price target of €256.55 is 21.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.