Expansion Into China And New Product Launches Like Climacool Will Strengthen Brand Visibility And Consumer Engagement

Key Takeaways

• Strategic retail investments and product innovations aim to boost revenue growth through enhanced brand visibility and consumer engagement.
  
• Expansion in China and new markets alongside region-specific products are expected to drive top-line growth and streamline operations.
  
• Concerns over Adidas' expansion, reliance on collaborations, marketing costs, tariffs, and regional dynamics may hinder revenue growth and profitability.

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' strategic investments in retail concepts, including women's stores and flagships in key markets, are aimed at strengthening brand visibility and consumer engagement, which should enhance revenue growth.
  
• The expansion plan for 300 stores in China's smaller cities and new market entries like Iraq and Nigeria are expected to capture local demand and contribute to top-line growth.
  
• The introduction of innovative and high-demand products, such as the Climacool and the relaunch of the Superstar shoe, could boost revenue and improve margins through pricing power and reduced discounting.
  
• Initiatives to strengthen relationships with Specialty Running retailers and increased demand in U.S. basketball could lead to growth in high-margin performance categories, positively impacting net margins.
  
• adidas' focused efforts on transforming the operating model with region-specific products and a local mindset are expected to streamline operations and potentially enhance earnings by leveraging regional market trends and consumer demands.

adidas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming adidas's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 7.8% in 3 years time.
• Analysts expect earnings to reach €2.3 billion (and earnings per share of €12.63) by about December 2027, up from €381.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2027 earnings, down from 113.2x today. This future PE is greater than the current PE for the GB Luxury industry at 19.6x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.74%, as per the Simply Wall St company report.

adidas Future Earnings Per Share Growth

Risks

• Concerns about the competitiveness and execution risks related to adidas' expansion into markets like North America and China could impact future revenue growth forecasts.
  
• The reliance on high-profile collaborations and limited edition releases, such as Yeezy, raises questions about sustainable long-term revenue streams.
  
• Heavy investment in sales and marketing, without immediate leverage, could pressure net margins and delay improvements in profitability goals.
  
• Tariff impacts and currency fluctuations remain uncontrollable factors that may continue to negatively affect gross margins and net earnings.
  
• Regional market dynamics, including promotional intensity and inventory management challenges, present potential risks for sustaining consistent revenue growth across different geographies.

Valuation

• The analysts have a consensus price target of €249.41 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 €285.0, and the most bearish reporting a price target of just €160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €29.5 billion, earnings will come to €2.3 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 5.7%.
• Given the current share price of €241.5, the analyst's price target of €249.41 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.