Preview of Adidas' Q3 2023 Earnings: Positive Outlook For Brand Momentum and Market Demand

On October 10, 2023, JPM released a preview of the Q3 financial report for Adidas. On November 8, Adidas will release its Q3 financial report.

Stock rating: Overweight

Industry viewpoint: Positive

Closing price: 166.64 € (October 9, 2023)

Target price: 195.00 €

On a reported basis - including the €350m Yeezy revenue JPM expect adidas to report in Q3 - JPM forecast Q3 c.FX sales +0.5% yoy, Q3 gross margin -40bps yoy and Q3 EBIT of €255m. When removing Yeezy revenue from both Q3’23 and Q3’22, the Q3 forecast implies c.FX sales +1.7% yoy, an acceleration vs. Q2 (-0.7%).

More broadly, JPM expect the results to reassure investors on several ares of focus including underlying brand momentum, inventory clearance and gross margin control. While JPM nudge up their FY23 c.FX sales growth and gross margin forecasts, underlying EBIT estimate is unchanged as JPM continue to expect any upside to be reinvested into the turnaround. adidas remains the top pick in the sector, with upside risk to cons. sales estimates ahead (driven by Terrace, Football and, particularly in Q4, the start of sell-in of new product for 2024) and scope for improved sentiment given less positive positioning among shorter-term investors than a few months ago.

1. JPM forecast Q3 c.FX sales +0.5% (incl. Yeezy): By region, forecast yoy c.FX sales growth in LatAm (+10%), China (+7%) and other APAC (+4%), offset by yoy declines in North America (-6.2%) and EMEA (-0.5%).

2. JPM forecast Q3 EBIT of €255m (incl. Yeezy): Within this, JPM forecast €350m Yeezy revenue and €150m Yeezy EBIT (implying EBIT excl. Yeezy of €105m, above thieir previous estimate of €99m) . At the group level, the Q3 gross margin -40bps yoy, assuming a net headwind yoy from product costs (mostly due to transactional FX) and still elevated markdown, partly offset by price and mix. JPM expect Yeezy to have a slightly negative impact yoy (as  Yeezy sales will be lower yoy). JPM forecast total group opex of €2,653m, inclusive of c.€80m restructuring costs, implying opex/sales of 44.4%, +410bps yoy.

3. JPM expect to see progress on several focus areas for investors in the Q3 results, including underlying brand momentum, and inventory clearance. On these: 1) JPM forecast DTC sales +13% yoy ex-FX, implying an increase in the 4-year stack (on an underlying basis - excluding Russia and Yeezy) vs. Q2, with positive trends in all regions  given still restricted sell-in, they see DTC growth as the best indicator of underlying momentum and 2) JPM forecast Q3 inventory -18% yoy to €5,165m, driven by Yeezy, disciplined buying (as can be seen in sales data from the manufacturers) and ongoing clearance activities (as commented on in our recent expert call).

JPM believes that the improvement in demand trends, including the stronger-than-expected recovery in the Chinese market, and strong expense controls have increased investment confidence, including the ability to achieve a long-term DD% EBIT profit margin. In addition, there is potential for upward revision of FY23 revenue guidance, leading JPM to rate Adidas as OW.