The sports equipment maker is going through a bad patch as the soccer World Cup unfolds. Slow economic activity in China, intense price war and rising costs are hurting Adidas. Whether traders are betting on the OEM’s performance or watching it continue to falter, everyone will find the right instruments for them on Swiss DOTS, Switzerland’s leading OTC platform for leveraged products.
The whistle for the opening match of the 2022 FIFA World Cup™ will sound on 20 November 2022 at Al Bayt Stadium, Qatar. The moment was to mark the start of a celebratory period for Adidas. Indeed, the sports equipment manufacturer’s three-stripe logo is ubiquitous in this tournament. Adidas is primarily a partner and official equipment supplier to FIFA, the International Federation of Association Football. So 5 of the 32 teams in the competition are wearing Adidas flocked jerseys. Among them three favourites: Germany, Argentina and Spain. But before the start of this event, the atmosphere at the group’s headquarters in Herzogenaurach, Bavaria, seems to be anything but euphoric. The World Cup is controversial because of the season, the climatic conditions and especially the human rights situation in Qatar.
Above all, there’s the real letdown that Adidas faces on the sidelines of this big event. The World Cup held in the desert state could even serve as a farewell tour for its CEO, Kasper Rørsted. In August, Adidas announced that it is parting ways with the Dane, who has been at the head of the group since 2016. As soon as a replacement has been found for him, he should give up his chair next year. Although Adidas was full of praise for Kasper Rørsted in the press release announcing the news, this unexpected change at the top of the pyramid is also an admission of structural difficulties within the world’s number 2 in the shoe market. This change comes “to give the company a fresh start”, the group announced publicly.
Cold sweat for the sports giant
With the publication of preliminary figures for the third quarter of 2022, Adidas clearly shows its unfortunate attitude. Adjusted for exchange rates, revenue increased by only 4% in July and September compared to last year. For the important Chinese market, Adidas announced a drop in revenue “in double-digit proportions”. In a press release, the Bavarian group explains that “This is due to the ongoing large-scale COVID-19 restrictions as well as the large stocks in stock.” In terms of profit margin, Adidas had a single-digit decline in the third quarter. With a rate of 8.8%, the indicator is approximately three percentage points below the level from the previous year. In terms of profit, it was more than halved to 179 million euros.
“Earnings growth in the third quarter was hampered by several non-recurring charges of nearly 300 million euros,” the officials wrote. These are largely the costs that the divestment in Russia entails. During the year as a whole, unusual events, such as the patent dispute with its American rival Nike, should amount to half a billion euros. According to the company, the number of customers in China is still quite low. In addition, Adidas seems to want to sell its large stocks. In light of this difficult situation, the CEO could only downgrade the 2022 forecast for the second time in three months.
Strong result warning despite the FIFA World Cup
For the current financial year, Kasper Rørsted now expects an increase in revenue of around 5% after adjusting for exchange rates. In particular, the FIFA World Cup should help the group achieve double-digit growth in the fourth quarter. However, the outgoing CEO only predicts an operating margin of 4%. Ultimately, he expects a profit of around 500 million euros for 2022. If this were to be the case, Adidas would only slightly exceed the level of 2019, the year of the COVID-19 pandemic (see graphic). The latest earnings warning is even more worrying when we remember the ambitions that management set at the start of the year. With double-digit revenue growth, initial forecasts called for a profit from operations between 1.8 billion and 1.9 billion euros.
Adidas faces a difficult market environment, inflationary pressures across the value chain as well as unfavorable exchange rates. The company has taken various measures, including hiring freezes. During the fourth quarter of this year, the cost reduction program should once again generate extraordinary costs. For 2023, the board would like to offset the cost reductions for an amount of up to 500 million euros. It is therefore a herculean task that awaits the replacement for Kasper Rørsted. The current good results from Puma show that the problems faced by Adidas are also of internal origin. Despite the vagaries of the market, its neighboring competitor is actually posting a record price in 2022, operationally. Puma collections now seem to appeal more to athletes around the world. If it’s only for the World Cup, the world number 3 gives the clothes to a team more than Adidas. Nati is one of the nations that will display the cat logo on their shirts.
A wise investment
On the stock market, Puma barely fares better than its competitors. For 2022, Puma and online fashion retailer Zalando are currently at the bottom of the DAX table. Adidas shares even fell below the 100 euro mark for the first time since spring 2016, as the correction failed to prevent it from falling below this threshold. However, Large Cap seems more and more overvalued. At least that’s what analysts think, who have not yet completely drawn a line under Adidas. However, eight research firms currently rate the stock a “buy.” At the same time, Reuters counts 23 “hold” and 6 “sell” recommendations.
Brave investors can bet on an uptrend – likely triggered by the World Cup – in Adidas’s price through the mini-long future (value 122401856). With this product, Societe Generale places the Stop Loss bar at 87.35 euros, i.e. almost 10% below the current underlying price. This situation results, among other things, in a leverage of 7.5. The upside participation is much lower in the case of another mini-long future (value 121518262) of the Swiss DOTS fund. The Stop Loss threshold is therefore lower there, at 74.45 euros.
Just in time for the football event, Vontobel bank launched several new Adidas-supplied products on the OTC platform. Among them, some short-term put warrants. Supporters of the fall can especially bet on bearish prices with a security (value 121586415). The exercise price is here set at 105 euros, therefore a good listing of the warrant in the currency. Conversely, the strike price for another put (value 121587614) is slightly below Adidas’ current quote. For these two values, the closure is planned for 16 December 2022, i.e. two days before the World Cup final. We will then see if Adidas gets on the podium with one of its teams or if it is forced to surrender its place to the competition.
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