Shares Soar! Beyonce! Yet Adidas Plays it Safe
(Bloomberg Opinion) -- It’s a bit odd for a company to be taking a conservative approach when it’s got Beyonce on board and its shares have hit a record high. But that is what Adidas AG is doing.
The stock jumped after the company presented a run of good news on Friday.
Sales excluding currency movements rose 4 percent in the first quarter, with growth in China and from the internet offsetting sluggish revenues elsewhere. Operating profit was much better than expected, rising 17 percent to 875 million euros ($975.9 million).
More-efficient sourcing and favorable currency movements boosted the gross margin, which in turn lifted the operating margin. This is key for Adidas as it has been trying to improve the latter – the ratio rose 1.4 percentage points to 14.9 percent.
And yet the company left its guidance for the full year unchanged. It sees sales growth excluding currency movements of 5 percent to 8 percent, and the operating margin rising from 10.8 percent in 2018 to between 11.3 percent and 11.5 percent.
The margin target looks conservative, given that the company has already beaten it.
But it’s not hard to see why Chief Executive Officer Kasper Rorsted would want to keep shareholder expectations from running away. It’s only the first quarter, and he is a long way from being able to be confident that the current performance can continue.
For a start, investors in consumer groups are becoming increasingly nervous about companies raising margins at the expense of sales growth.
And Adidas is still recovering from a tough 2018. U.S. sales had been hit by shortages in the supply of mid-market clothing, and now it has to turbocharge revenues there. It also must return to growth in Europe.
Both should be achieved by the end of the year. The first products from its new tie-up with Beyonce will launch later in 2019, and adding another celebrity collaboration to a roster that already includes Kanye West and Pharrell Williams should bolster sales.
But the company still will have to tackle a number of significant challenges. It has yet to stop the sales decline at Reebok, which is surprising given that the brand’s Classic range has become a millennial favorite.
And the competitive environment is getting tougher, particularly in the U.S. Nike Inc. has returned to form, while Under Armour Inc. could be becoming more of a threat.
Investors certainly seem to believe the group has a good chance of outperforming the current targets. The shares rose about 7 percent, taking the gain this year to 34 percent.
Although Adidas remains at a discount to Nike on a forward price earnings basis, it has begun to close the gap. To narrow it further, it has to squarely tackle its performance problems. And to get investors crazy in love with Adidas again it is going to have to pick up its earlier trend of raising its forecasts on a regular basis.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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