The Real Winner of the World Cup?

Soccer mania has swept through the world as the FIFA World Cup continues.

The U.S. is stoked with the men’s national team advancing to the Round of 16. 

Typically, such newsworthy events garner heavy search volume in related names like Nike (NKE) and Under Armour (UAA).

But Adidas (ADDYY) is the one that caught our attention.

Our proprietary Trackstar database showed a surge in financial pros’ searches for ADDYY in the last couple of weeks.

While the total number of searches (71 for the last month) might not seem like many, consider that average weekly searches have stood at around 3.

Last week, they spiked to 19, a more than 600% increase!

A World Cup sponsor and the official shoe for 311 players in the tournament, Adidas is a global brand in soccer and athletics.

Shares peaked at $196 each in 2021, falling sharply to $45 earlier this year.

Since then, they’ve recovered some of those losses, now trading above $60.

We wanted to know if Trackstar is hinting more upside in the near future.

Adidas’ Business 

Adidas is the fourth-largest sporting goods company behind Anta Sports, Lululemon Athletica, and Nike. 

The company sells athletic footwear, clothing, and sports equipment via its website, its retail stores, online retailers, and third-party retail stores. 

It’s had revenue growth in the soccer and running categories and expects a boost from soccer-related footwear and jerseys sales with the 2022 World Cup. 

However, Adidas is dealing with a series of setbacks.

It recently ended its partnership with controversial rapper Kanye West and his Yeezy brand. The company is expected to lose $247 million in 2022 and $400 million in 2023 sales after terminating this deal.

Moreover, the company’s traffic has deteriorated in Greater China, and consumer demand has slowed in major Western markets. It suffered another blow when it suspended its operations in Russia following Russia’s invasion of Ukraine. 

Despite all the challenges, Adidas continues to grow sales across the globe outside of China.

Source: Adidas

Financials

Source: Yahoo

Like many apparel companies, Adidas has struggled with higher supply chain costs, product costs, and freight expenses. 

Additionally, it rolled out heavy discounts due to an inventory buildup and less-than-favorable economic conditions. 

This gave the firm less operating cash flow last year than years prior. 

For example, its operating cash flow in 2019 was $2.8 billion. In the last 12 months, operating cash flow was $1.5 billion. 

Adidas’ free cash flow is $757 million over the last 12 months compared to $2.5 billion in 2021. 

But the firm’s revenues of $21.7 billion over the last 12 months are above 2020’s $19.8 billion.

ADDYY has $806 million in cash and $5.9 billion in total debt. The firm’s financial position is stable, with a current ratio of 1.25x.

Valuation

Source: Seeking Alpha

Even with sales declining in Greater China, ADDYY trades at a 1.1x price-to-sales ratio. 

That’s lower than its biggest rival, NKE, at 3.5x.  

But it’s not as competitive as other players in the sporting goods space. Specifically, Dick’s Sporting Goods (DKS) at 0.76x, Academy Sports (ASO) at 0.68x, and UAA at 0.84x. 

ADDYY trades at a multiple similar to NKE’s, a P/E GAAP ratio of 30x vs. 29.8x, respectively. 

UAA doesn’t have a P/E GAAP ratio, while DKS’ is 10.4x and ASO’s is 7.1x. 

Investors seeking income will prefer Adidas’ dividend yield of 2.79% compared to NKE’s 1.3%, DKS’ 1.6%, ASO’s 0.59%, and UAA’s 0%. 

Profitability

Source: Seeking Alpha

ADDYY outshines its peers with a gross profit margin of 49.5%, notably better than NKE at 45.3%, DKS at 36.1%, ASO at 34.5%, and UAA at 44.1%. 

BUt the company isn’t as strong in other profitability metrics. 

For example, its EBIT margin of 6.5% doesn’t come close to NKE’s 13.2%, DKS’ 13.4%, and ASO’s 13.3%. 

The same is true with its net income margin of 5.9%. It trails NKE at 11.9%, DKS at 9.5%, and ASO at 9.7%.

ADDYY is implementing a business improvement program to safeguard its profitability in 2023. 

It plans to mitigate the significant cost increases resulting from inflationary pressure across its value chain and unfavorable currency movements.   

Growth

Source: Seeking Alpha

ADDYY’s direct-to-consumer business grew substantially, 6% YoY, in Q3. Strong double-digit increases in Europe, the Middle East and Africa, North America, and Latin America drove the company’s e-commerce revenues up 8%. 

Overall, Adidas’ revenue grew 3.5% YoY, higher than NKE at 2% and DKS at 0.47%, but not as strong as ASO at 3.7% and UAA at 27%.

Our Opinion 8/10

Shares of ADDYY are down 57% YTD. 

While the company faces many challenges, including the loss of Yeezy sales, one could argue that its stock decline is overdone. 

Adidas is huge in soccer, with 38% of the top European players, including Lionel Messi, wearing its brand. 

Shares haven’t traded this low since June 2016. 

It could be a bumpy road for the next several quarters, but buying ADDYY at these levels should pay off if you’re a long-term investor, as long as you size your position appropriately.