EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Adidas Outpaces Competition by Riding a Fashion Wave; FVE Increased

We maintain our narrow moat rating on Adidas but raise our fair value estimate to EUR 199 from EUR 164. Accounting for most of the increase in our fair value estimate, we have raised our average annual revenue growth expectation to 7% from 6%. We had previously expected revenue growth would drop to 4% by 2025, but we now think growth can remain above 6% over the next decade due to 10% or better annual growth rates from Asia-Pacific. We believe Adidas will gradually increase share (currently 20%) in China, where we forecast 10% compound annual growth in activewear. We have also increased our forecast of Adidas’ average gross margins over the next 10 years to 53% from 51%. While we had previously expected its gross margins to peak at 52% in 2019 and then decline, we now think they can gradually rise to 53% on supply chain optimization.

Our narrow moat rating is based on Adidas’ intangible brand asset. We believe the firm is executing well on the five-year plan it announced in 2015. We forecast Adidas’ e-commerce, now available in more than 40 countries, will account for 15% of total 2020 sales and approach its sales target of EUR 4 billion for the year. We also think Adidas is improving its supply chain to increase the speed at which its products reach consumers. In 2018, 37% of Adidas’ sales were generated with its faster production process, up from 28% in 2017.

We forecast continuing growth for Adidas in North America, where its revenue has increased by about 50% over the past five years. Adidas has overcome weakness in U.S. physical retail by introducing innovative and fashionable product. The firm has expanded its previously limited Yeezy line of shoes and recently beat out both wide-moat Nike and no-moat Under Armour to sign a major deal with Beyonce. While such deals are expensive, they allow Adidas to move beyond athletics into broader fashion.

We view Adidas, up sharply since the beginning of the year, as overvalued.