By Tonya Garcia, MarketWatch
Adidas AG stock got a bump this week from better-than-expected second-quarter earnings, but Wells Fargo analysts caution that the athletic gear company is facing a tough second half to fiscal 2018 without the World Cup to generate excitement and boost results.
Adidas /zigman2/quotes/206448829/delayed XE:ADS -1.52% /zigman2/quotes/202556172/delayed DE:ADS -1.38% reported earnings per share of €2.05, up from €1.70 last year and ahead of the €1.87 FactSet consensus. Revenue totaled €5.26 billion, up from €5.04 billion and exceeding the €5.18 billion FactSet guidance.
Shares jumped 9.4% on Thursday before pulling back 1.3% on Friday. They gained 8.5% for the week.
Wells Fargo analysts led by Tom Nikic found reasons for concern despite the beat. One of them is the World Cup bump the company got in the second quarter.
“[T]hough top-line growth was in line with Q1, excluding acceleration in soccer/football-dependent markets that were aided by the World Cup (Latin America improved by 5 points to 15%, while host country Russia improved by 30 points to +14%), growth would have decelerated by about 200 basis points (and this excludes whatever lift the company saw in Western Europe, which was more than offset by market headwinds),” the note said.
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Looking forward, revenue is “more likely to decelerate than accelerate” because of the end of the tournament. France, which is sponsored by Nike Inc. /zigman2/quotes/203439053/composite NKE +0.45% , won the World Cup, so the long tail of the tournament is cut short. Moreover, Adidas will start to lap World Cup sales in the fourth quarter.
Wells Fargo rates Adidas shares market perform with a €205 price target.
Also of concern is the weakness in Western Europe, which reported flat revenue for the second quarter.
Adidas Chief Executive Kasper Rorsted acknowledged on the earnings call that the company is “facing challenges” in the region “related to the fact that we have not executed as well as in the past on our product storytelling and consumer activation,” according to a FactSet transcript. The company has changed the lineup of its management team to resolve the issues.
“Notably, the brand has slowed materially in Western Europe (Q1’s +5% was the slowest growth in four years, with Q2 planned just flat), which is somewhat concerning given that the company’s home market has historically been a leading indicator for the brand,” Wells Fargo said.
Competitors like Nike and VF Corp.’s /zigman2/quotes/206706147/composite VFC +0.88% Vans brand have been doing better in Western Europe, which could also be applying pressure, analysts wrote.
Adidas has been growing in North America, up 16% in the second quarter in the region across the Adidas and Reebok brands. But checks Wedbush analysts conducted “indicate weakness in premium and mall channels in North America,” they said in a note, which limits sales upside.
“[R]isks to the story and the group’s multiple have increased, particularly when it comes to mounting comparisons, the possibility of a Nike sales stabilization and acceleration, FX, and a more challenged, promotional U.S. or European market,” Wedbush said.
Wedbush rates Adidas shares neutral and raised its price target to €195 from €180.
Raymond James analysts give Adidas credit for handling the “soft landing of its mega footwear franchises, Stan Smith and Superstar.”
Rorsted said the company has managed the brands after they “surpassed their peaks in this current cycle.”
Raymond James looks back at what they see as the missteps of Puma a decade ago, in which they emphasized lifestyle looks at the expense of sports styles.
“The success story of Stan Smith and Superstar has been critical in helping Adidas penetrate the U.S. market, but we feel the company’s overall risk profile benefits from the rebalancing of its core brand growth triggers,” analysts said.
Raymond James rates Adidas shares market perform.
Adidas shares have rallied 23% for 2018 to date, outpacing the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.47% , which has gained 6% for the period. Germany’s DAX index /zigman2/quotes/210597999/delayed DX:DAX -0.04% has fallen 3.8% this year.