Global Sports Events And DTC Expansion Will Support Margins Despite Regional Headwinds

Catalysts

About adidas

adidas designs, manufactures and markets athletic and lifestyle footwear, apparel and accessories across global sports and fashion categories.

What are the underlying business or industry changes driving this perspective?

• Although global sports visibility is expanding with the 2026 World Cup and Olympics, event driven demand is unlikely to be fully incremental. World Cup related product will displace other assortments on retail floors, which could cap revenue uplift and limit operating leverage on marketing spend and inventory.
• Despite strong innovation in running and cushioning platforms such as Hyper Boost and Adizero, adidas is entering the comfort and everyday running segment later than several focused competitors. This may slow share gains and temper medium term revenue growth and gross margin upside from performance footwear.
• While the brand is growing rapidly in Greater China and other Asian markets with more localised product creation, the need to stay price competitive against strong local players in key price bands could constrain pricing power and net margin expansion as the mix shifts toward value oriented offerings.
• Although direct to consumer, e commerce and own stores are comping double digit and support structurally higher gross margins, intensifying online discounting and promotional pressure from over inventoried peers may limit further mix driven margin gains and keep earnings growth closer to top line growth.
• While the push to scale in North America, including greater investment in American sports and college partnerships, is essential to long term growth, the region’s structurally lower margin profile and tariff burden on imports risk diluting group EBIT margin and moderating earnings growth as the U.S. becomes a larger share of sales.

Assumptions

This narrative explores a more pessimistic perspective on adidas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming adidas's revenue will grow by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.9% today to 8.1% in 3 years time.
• The bearish analysts expect earnings to reach €2.4 billion (and earnings per share of €13.74) by about December 2028, up from €1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €3.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 24.7x today. This future PE is lower than the current PE for the GB Luxury industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained double digit revenue growth across regions including Europe, Greater China, Japan, South Korea and Latin America, combined with strong wholesale and e commerce momentum, could push the share price higher if the market begins to price in structurally higher long term revenue growth and brand strength.
• Expansion in high visibility performance categories such as football, running, training and basketball, together with successful World Cup product launches and a EUR 1 billion plus World Cup program, may drive a step up in performance related sales and operating leverage, lifting earnings beyond what a flat share price would imply.
• Innovation platforms like Adizero racing, the new Hyper Boost foam and the scaling of comfort and everyday running, as well as lifestyle running and Originals sports lines, could unlock new premium product cycles that support higher average selling prices and structurally stronger gross margins and net margins.
• Adidas’ local creation model in Greater China and other Asian markets, where more than half of apparel is locally designed, is already delivering double digit growth and improving profitability, and continued market share gains in these higher margin regions could accelerate group EBIT and earnings growth.
• Management has already achieved around a 10 percent EBIT margin earlier than planned, is signaling FX tailwinds and further operating overhead leverage, and is discussing potential future share buybacks once cash targets are reached. All of these factors may re rate the equity upward as investors upgrade long term earnings and capital returns expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for adidas is €156.02, which represents up to two standard deviations below the consensus price target of €222.33. This valuation is based on what can be assumed as the expectations of adidas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €278.0, and the most bearish reporting a price target of just €135.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €29.9 billion, earnings will come to €2.4 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €167.5, the analyst price target of €156.02 is 7.4% lower. 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.