Over the weekend we moved ADDYY back to our Best Idea Short list. We noted the stock was approaching its consensus price target of €160, meaning we should expect either upgrades and price target increases, or downgrades. Over the last few days it has gotten several Old Wall upgrades and we’ve been hearing from investors that that the bull case being pitched right now is the around hot growth of Samba and Gazelle shoes. We agree both styles are hot and seeing exponential growth lately with ramping online interest on google. But let’s take a step back and put the momentum around these silhouettes into context…
Adidas Management cited a ramp to ~1mm pair run rate for Gazelle’s, and we think Sambas are about 2x the size of Gazelles. So together they account for maybe about 3mm pairs. But that is 3mm in a footwear business that does ~400mm pairs annually. Even if these are growing at around 100% YY we’re talking maybe a 1% sales lift with ~€40mm per Q. Keep in mind that over the course of this year, the company is going up against the termination of the Yeezy contract, which has a negative €1.2 BILLION impact hit to revenues for the year with ~€350mm in the next couple quarters. So while Sambas and Gazelles are on fire right now, the incremental contribution on both a unit and euro basis is barely going to move the needle while the company loses its biggest revenue driver of the last 5 years. If the bull case is around Sambas, we should consider the risk to the other ~98% of the forward revenue base. We think this company needs to be torn down and rebuilt from the ground-up. It will take a few years, during which it will be a share donor, especially to Nike. Lets not forget that Nike is now going back into a handful of wholesale doors, and its not like the wholesalers are going to expand the shoe department. They are going to reduce the shelf-space of other companies to give that space to Nike, i.e. Adidas shelf-space is going to shrink. We think the consensus outlook on EPS recovery is way too high next year at €3.86. It should be about €2.00. When the market realizes the magnitude of the problems here and earnings risk over a TAIL duration we think the stock goes to well below €100.
