Earnings Preview: Will Adidas Make a Comeback in Q1?

Adidas Group’s executive team continues to counter skepticism and negative chatter about the brand by pointing to the company’s ambitious growth goals and strategies for a rebound in the leadup to its Q1 earnings release on May 5.

According to reports out of Berlin over the weekend, posted by Reuters, CEO Herbert Hainer said the company’s financials in Q1 will provide evidence of an “excellent start” to the year.

Hainer, whose contract with Adidas is expected to end in 2017, has faced his share of criticism in recent years, ranging from what insiders have called an “overpriced” $3.8 billion buy of Reebok in 2006 to an “inability to create products that resonate in North America.”

“Reebok has not been resonating nearly as well in the U.S. as it has internationally; it’s declining and expected to decline in 2015,” Susquehanna Financial analyst Christopher Svezia told FN in March. “I think there’s product that they come up with that works well in other markets that just doesn’t translate in the U.S.”

In March, Adidas posted a fourth-quarter net loss of 139 million euros, or $173.6 million, based on the average currency exchange for the period, which ended Dec. 31, 2014.

The German sportswear company attributed much of its loss to the goodwill impairment of 79 million euros, or $101.9 million, and the 82 million euro, or $94 million, hit it took on the sale of the Rockport brand in January, as well as a slowing golf market and further declines in the Russian-ruble exchange rate.

Following the Q4 release, the company held a two-day investor relations meeting on March 25-26, during which Hainer laid out the brand’s five-year strategy, centered on “speed, focus and openness.”

The plan projects currency-neutral sales growth at a high-single-digit rate, on average, per year; a 15 percent increase in net income, on average, per year; a significant reduction in production lead times; and targeted marketing in six major cities — Los Angeles, New York, London, Paris, Shanghai and Tokyo.

Analysts say the company — which saw a 6 percent gain in revenues, to 3.6 billion euros, or $4.5 billion, in Q4 — should post greater profitability in Q1, driven primarily by the weaker euro. Oher issues, however, are likely to remain for some time.

“There’s been a huge tailwind from the euro, but I’m not sure the tailwinds tell the full story,” said Morningstar analyst Paul Swinand, adding that the European economy has also improved. “I’ve been bullish, but the issues are the long run in China, getting back on track in the USA and carrying out the plan for the Reebok rebound.”

Svezia was also fairly upbeat on the brand, raising his EPS estimates from 1.02 euros to 1.12 euros, while still citing a few concerns.

“We increased our estimates due to accelerated growth at Adidas and a strong currency tailwind — to the tune of 700 basis points — on the top line,” said Svezia in a note last week. “Momentum in Europe and China should continue, while North America likely inflects on improved sell-in at Adidas. At [TaylorMade Adidas Golf Company], while industry commentary has a more bullish tone, we don’t suspect a turn this quarter as meaningful changes to the product launch cycle likely isolate benefits to 2Q/3Q.”

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