Adidas catch-up remains off the necessary pace

Ye of little faith. Adidas still has the slight air of a middle-distance runner that has tripped over its own feet. After a disastrous 2022 breakup with Ye, the singer formerly known as Kanye West, the 34 billion euro sneaker maker is now grappling with a ropey U.S. market. Given this weakness is already hitting rival Nike, investors are understandably questioning whether CEO Bjorn Gulden can make it to his finish line.

Adidas has embarked on a mini recovery in the past year. Gulden set out to clear the remaining stock of the once highly profitable Yeezy sneakers and rode a wave of demand for fashionable sportswear through retro sneaker lines Samba and Gazelle. By the end of the year, these tactics appeared to be paying off: Adidas’s shoe sales grew 8% year-on-year in the three months ending December versus a 13% decline in its apparel division. The company’s share price also grew 44% in 2023, outperforming rivals Nike and Puma as they struggled with a decline in demand for their products.

Gulden is betting he can keep up this pace. Although 2023 marked the company’s first net loss in more than 30 years and the former Puma boss has accepted that the Yeezy crisis will continue into 2024, he also reckons he can deliver a 10% operating profit margin by 2026 as well as double-digit sales growth.

Weakness in the U.S., however, will make this harder. Adidas made nearly a quarter of its 21.4 billion euros of sales in 2023 in the world’s largest economy, and Gulden has admitted that the market will be more challenging in 2024. This is an added headache given the tracksuit maker is already dealing with a pile up of inventory there.

These weaknesses help explain what investors are and aren’t pricing in. If Gulden can grow its 21 billion euros of 2023 sales by 7% over the next three years and reaches its 10% operating profit margin target the company would then deliver nearly 2.6 billion euros of operating profit by 2026. A sportswear peer group including premium legging maker Lululemon and Nike trades on 18 times their operating profit for that year. That suggests Adidas’s valuation including debt should arguably be 48 billion euros, rather than the 39 billion euros at which it actually trades. Investors will need to see a more sustained sprint before they start to believe Adidas can make a comeback.