As a Result of the Hottest Shoes in Paris, Adidas Lifts Guidance and Shares Climb

Adidas shares saw a significant rise on Wednesday following an optimistic update from the sportswear company. This positive news stands out in the retail sector, which has been plagued with a series of negative updates recently.

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In a pre-announcement of its second-quarter results, Adidas reported an 11% increase in revenue on a constant currency basis compared to the previous year, with a 16% rise when excluding sales from its Yeezy line. The German company attributed its better-than-expected performance to current business momentum and adjusted its annual forecast accordingly. Adidas now expects its revenues to grow at a high-single-digit percentage rate this year, with profits projected to reach approximately €1 billion ($1.09 billion), up from an earlier forecast of €700 million ($765 million).

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“These results largely confirm our view that Adidas has unique brand and product momentum that is not fully recognized in market expectations, supporting our positive outlook on the stock,” stated Piral Dadhania, an analyst at RBC, in a client note.

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Dadhania also expressed confidence in the company’s prospects, anticipating “top-line acceleration” in the second half of the year as Adidas builds on its current momentum. This optimism is partly driven by the popularity of the Terrace shoes, including models like Samba and Spezial Light, which were initially designed for soccer and handball players but have recently gained widespread appeal. The previous day, the Spanish edition of Bazaar highlighted the retro-style shoe’s popularity in Paris, noting it as a favorite among stylists and available at a discounted price on Amazon Prime.

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Cédric Rossi from Bryan Garnier referred to Adidas’ progress as a “relentless recovery,” noting that the company’s upward revision of its 2024 guidance for the second consecutive time has strengthened their confidence in Adidas’ solid recovery. Consequently, they upgraded the stock to a buy rating. “Adidas’ innovation cycle is still ramping up, and its market execution has improved,” Rossi commented.

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Analysts at UBS pointed out that Adidas’ underlying earnings before interest and taxation exceeded expectations, even considering a €50 million benefit from Yeezy sales compared to €150 million the previous year.

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Adidas also reported that its gross margin slightly dipped to 50.8% in the second quarter from 50.9% in the same period last year. However, operating profit surged to €346 million from €176 million, including a €50 million contribution from the sale of parts of the remaining Yeezy inventory.

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Adidas severed ties with Yeezy creator Ye, formerly known as Kanye West, after he made several antisemitic remarks in 2022. The company estimated it had $1.2 billion worth of Yeezy inventory and pledged to donate some of its profits to charity.

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Adidas shares increased by nearly 4%, with rival Puma’s shares rising by 2.3%. This positive development for Adidas contrasts with the broader challenges faced by retailers, particularly in the high-end market. Recently, companies like Burberry, Swatch, and Hugo Boss have issued warnings about difficult market conditions in China, indicating that consumers are becoming less extravagant in their spending.

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Burberry, for example, highlighted challenges in the Chinese market, which is crucial for many luxury brands. The company noted that while demand remains strong in other regions, the Chinese market has been sluggish, impacting overall performance. Similarly, Swatch and Hugo Boss have expressed concerns about the economic environment in China, affecting their sales and growth prospects.

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Despite these challenges in the broader retail sector, Adidas' strong performance and optimistic outlook suggest that it has effectively navigated these difficulties. The company’s strategic decisions, including its innovation in product lines and efficient market execution, have contributed to its resilience.

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As the year progresses, Adidas is expected to continue leveraging its brand strength and product appeal to sustain growth. The company's ability to adapt to market dynamics and consumer preferences will be crucial in maintaining its competitive edge and achieving its revised financial targets.

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Overall, while the retail sector faces numerous headwinds, Adidas’ recent performance provides a glimmer of hope, showcasing the potential for companies with strong brand equity and strategic agility to thrive even in challenging environments.

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