Stock price: €42 ($51.22 USD)
Conclusion: A slight rebound at Reebok (RBK) combined with a strong dollar lead us to upgrade our valuation range for Adidas (OTCQX:ADDYY) to €43-€45 per share. Nonetheless, we think Puma (OTC:PMMAF) offers higher re-rating potential.
Q1 results: Sales up 4% to €2.6bn-Net income: €168m (€5m last year) EPS guidance 2010 raised to €2.05-2.30.
Looking for mid single digit organic growth in sales.
- Growth held back by wholesale. Sales increased by only 1% in Q1, impacted by lower revenues in China where Adidas lost share against Nike, Japan and Emerging Europe. The environment remains fragile in Europe with weakening consumer confidence in May. China is expected to be stronger in H2, following inventory clearance in the first half of the year. Sales should continue to be positively impacted by the FIFA World Cup in Q2 and Q3.
- Retail up 16% in Q1 (2228 stores) could grow double digit this year helped by store expansion (125 new stores in emerging markets) and mid single digit growth in comparable store sales.
- We expect both Adidas and Reebok to increase sales this year, albeit at a lesser rate for Reebok. Although the toning category is doing well, Reebok continued to report weak sales outside the US, notably in China and in LatAm.
Management could further upgrade EPS guidance.
- Reported sales could grow almost double digit to €11.3bn, boosted by a weak euro.
- Gross margin could reach the top end of management forecast (around 47.4%), driven by lower input costs, faster growth in retail, lower level of clearance sales and a stronger Ruble. Adidas is 100% hedged for 2010 ($1.38), at rate slightly less favourable than in 2009.
- Operating expenses will benefit from positive leverage combined with headcount reductions in wholesale, offsetting higher marketing and retail spending. Operating margin could improve to 7% of sales.
- EPS could reach €2.36 in 2010, exceeding the top end of Adidas guidance ($2.05-2.30). 2011 outlook looks uncertain for two main reasons, first sourcing costs could be under pressure ( dollar exposure only 50% hedged), second the market remains very price competitive.
Adidas trades at 17.8x P/E based on 2010 estimates, implying 18% premium to Puma. A further rerating would be required to bridge the margin gap between Adidas and Reebok (10 points ), which might take time. We favour Puma which is valued at lower multiple coupled with structurally higher margin.