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Morningstar | Adidas Posts Strong Fiscal 2018 Results Driven by E-Commerce and North America; Shares Expensive

Narrow-moat Adidas ended fiscal 2018 on a strong note, posting full-year results that outpaced our estimates as the firm continues to benefit from on-trend merchandise. The story remained consistent throughout the year, with sales growth driven by North America (up 15%) and China (up 23%) outperforming, and profitability expanding as sales trended toward brand-accretive channels (e-commerce up 36% to over EUR 2 billion for the year). As a result, we anticipate a high-single-digit increase to our fair value estimate of EUR 155 ($90 per ADR), to account for the near-term success. However, we continue to believe that Adidas competes in a highly competitive environment and will need to increase spending on marketing, product innovation, and supply chain initiatives, represented in our long-term outlook calling for 5% sales growth, 50% gross margins, and 10.3% operating margins on average over the next 10 years.

For the year, Adidas reported currency-neutral revenue growth of 8% on 51.8% gross and 10.8% operating margins outpacing our estimates of 5%, 51%, and 10.7%, respectively. Additionally, management provided an outlook for 2019 calling for sales growth between 5% and 8%, 52% gross margins and operating margins ranging from 11.3% to 11.5% (versus our forecasts of 4%, 50.5% and 10.2%, respectively).

We are encouraged by the firm’s efforts to improve manufacturing speed with its “Speedfactories” to produce limited-edition items (a popular trend across the space) in a way to keep the brand fresh and stay on top of consumer trends. We contend that these limited-edition products help the firm manage inventory levels and increase full-priced merchandise, seen in inventory levels decreasing 5% for the year and gross margins increasing 140 basis points (to 51.8%). We believe these efforts strengthen the firm’s brand intangible assets, which continue to allow Adidas to price its products at a premium, underpinning our narrow moat rating.

Additionally, the company announced it had apparel supply chain issues in North America and expects the shortages to marginally reduce the first half of fiscal 2019 sales (approximately a EUR 200 million to EUR 400 million impact). We believe this issue is short term and will not materially affect our long-term revenue forecast.