Adding ADS-DE to Long Bias List. Arguably A Cheaper Way To Play Nike. Adidas reported 3Q EPS of €2.80 vs consensus €2.60, with similar revenue and e-commerce trends compared to both Nike and UnderArmour, albeit with not as much all around upside relative to expectations. What caused the stock to trade down ~5% on the day is that the company guided toward a 4Q sales development similar to what it saw in 3Q (ie no sequential improvement) due to a strong comp in 4Q last year, where the launch of UEFA 2020 merch and earlier shipments due to a different timing of Chinese New Year drove 11.5% revenue growth, its highest quarterly report of the year. In addition, in the conference call, CEO Rorsted noted new lockdowns in Europe have led to 40% of its stores in the region being closed. Globally, open rates are between 92 and 93% -- down from 96% at the end of the third quarter. Stricter social-distancing guidelines are also having a negative impact in European stores that are open. Rorsted also threw a wet blanket on North America highlighting potential lockdown risks, and noted that benefits of fiscal stimulus and pent-up demand have definitely faded. Another factor keeping a lid of 4Q sales will be keeping lean inventories in favor of supporting a full-price sales model – similar to what we heard from UnderArmour. We’re big fans of that on our end. Gross Margin bullish, aside from the obvious lift from e-comm. In total, third-quarter revenues decreased 3 percent in currency-neutral terms, improving on the 34 percent drop seen in the second quarter. In euro terms, revenues decreased 7.0 percent to €5.964 billion. As expected, e-commerce was strong in the quarter – up 51% from last year. Not as strong as Nike, but on par with what we’re seeing from other brands with some degree of heat in the marketplace. Brand Adidas declined 2% in the qtr after falling 33% in 2Q, a nice sequential lift. Strongest categories were Originals and Run. Reebok still a drag on the portfolio – down 7% for the quarter. Rorsted wouldn’t comment on the divestiture – calling it a rumor – even though he started the rumor in a German magazine two weeks ago. That brand likely ends up in private equity’s hands over a six month time period. No strategic buyer will touch it. We’re not averse to owning Adidas by any means. The company is executing, it’s getting rid of Reebok, and we’ll have a streamlined financial plan in March of 2021 that’s likely to mirror Nike’s Consumer Direct Offense. There’s plenty of room out there for more than one company to have a similar strategy, especially when we’re going through the greatest paradigm shift in a lifetime towards online shopping – vaccine or no vaccine – and Adidas has the brand assets to capitalize and take margins 300-400bp higher. We could argue that buying Adidas is a cheaper way to buy Nike.
