Definitely a noisy quarter for Adidas, but on the whole, no different than what we saw from Nike in late September. Headline missed, coming in at €2.34 vs consensus €2.44 – which was below our expectation for the quarter. A rare miss for Adidas vs our model. The company highlighted and quantified the supply chain and lock-down issues – which is safe to say is transient, not company specific, and most importantly is getting better on the margin. With the factory closures Adidas estimates that in Q4 there will be a €400mm headwind to revenue while in Q1-2022 there will be a €600mm headwind. Quality of sale is improving, however, with global full price selling improving by 15 percentage points vs last year. Lastly, the company noted freight costs as a €200mm headwind to gross margin in the quarter with inventories down 20% YY. We had already assumed a revenue hit in our model after the Nike guide-down, so we’re not materially changing our estimates. Though people were hyper-focused on China in the Q&A – as it was down 11% in the quarter, we’d note that we saw a 500bp sequential acceleration, and the company is significantly stepping up demand creation in the region. We think the slowdown that Adidas and Nike are seeing in China is more Macro-related than due to a shift to local brands (a popular narrative these days), and we think China will surprise on the upside by 2H22. One thing nobody asked about was the continued de-levering (€836mm in debt repayment) and stock repo – which was €491mm in the quarter – and we haven’t even seen the proceeds yet from the sale of Reebok – which will likely go entirely towards stock repo. Overall, no material change to our view on Adidas from when we added it to our Best Idea list (see our note ADS-DE/ADDYY | Adding To Best Idea Long List for full investment thesis). We’re buyers on the weakness around the print as we think the name doubles over a TAIL duration due to outsized earnings growth and subsequent narrowing of the multiple discount to Nike.
