Patient investors looking to own a leader in the branded athletic clothing and merchandise business just might find this to be a company worth considering.
Adidas
2022 was something of a rough year for the sports apparel team at Adidas (ADS.DE). The company a key spokesperson (Kanye West) and his related brand (Yeezy) due to West’s anti-Semitic remarks. On top of that, Germany’s earlier than expected exit from the 2022 World Cup lost Adidas a fan favorite team from the perspective of merchandise sales.
Those rough patches are part of the reason why Adidas’ shares fell by about half last year from €254.10 at the end of 2021 to €$127.46 at the end of 2022. Indeed, it’s almost fair to ask if anything can go right for Adidas. After a rough year for its image and its investors, is there a chance that 2023 might end up better for this athletic clothing giant?
The market should be forward looking
If there’s an upside to such a rough year for the company, it’s that the company’s earnings are expected to more or less double in 2023. Analysts are projecting an increase from an estimate of €2.47 per share in 2022 to an estimate of €5.05 per share in 2023. That brings up one of the nice things about the stock market -- it tries to be forward looking. Now that 2022 is in the past, the company can focus on making the future better.
On that front, Adidas is taking steps to get itself back on track. For instance, it’s rebranding the Yeezy line, in an attempt to recover its investment in the brand, while still disassociating itself from Kanye West. If successful -- like Adidas’ rebranding of the former Kobe Bryant line was -- it will save Adidas somewhere in the neighborhood of $300 million while still allowing it to profit from the products.
Adidas is also continuing to drive its “Own the Game” strategy, which includes partnerships with other famous athletes and celebrities. It also includes a membership program, which it expects to be able to grow to half a billion members by 2025. That’s an outstanding way to be able to directly reach tons of engaged consumers, potentially at a lower cost than through traditional media and sponsorships.
All told, Adidas is doing what it can to put the challenged year that was 2022 behind it and focus on a brighter, more profitable future.
What about its financials?
Adidas is able to make changes to help its future despite its 2022 troubles in part because it has a solid balance sheet. Its debt to equity ratio of around 0.9 means it hasn’t over-leveraged itself to the point where it’s at significant risk of not being able to roll its debt as it comes due. Similarly, its current ratio above 1.2 means it is able to cover the bills coming due in the not too distant future even if its revenue struggles. That solid financial foundation helped keep a tough 2022 from getting even worse.
With its estimated €5.05 of earnings for 2023, its recent market price of €127.46 gives it a forward price to earnings ratio around 25. While not a deep value price, it does showcase another benefit of the company’s 2022 share price decline for potential new investors. Without that decline, new investors would be paying a significant premium for the company’s expected earnings. Thanks to that decline, however, new investors are getting the company for a price that’s not out of line with other solid companies with decent long-term prospects.
On top of that, the company offers a dividend that it targets to somewhere between 30% and 50% of its earnings. That payment, while variable based on how the company performs, does give investors a great shot at a decent reward for the risks they’re taking by investing, even when the stock doesn’t move up.
All told, it’s a solid company on the mend
After a rough 2022, Adidas looks like it is doing what it needs to do in order to get itself back on track for 2023 and beyond. Its shares may be down, but the company is certainly not out. Patient investors looking to own a leader in the branded athletic clothing and merchandise business just might find this to be a company worth considering.
At the time of publication, Chuck Saletta did not own shares of Adidas.
Adidas