Adidas’ winning streak faces test as Q2 stirs doubts

Adidas' weaker-than-expected Q2 results, stemming from sluggish direct-to-consumer sales and European challenges, have raised investor concerns regarding its turnaround momentum. Despite this, UBS maintains a Buy rating and €274 price target, anticipating new product franchises will drive H2 growth, bolstered by July sales improvements in Europe and FX hedging benefits into 2026. While Adidas trades at 24x 2025 earnings, below its implied long-term growth, UBS highlights that Q3 performance will be crucial for a definitive assessment of the company's trajectory amidst fragile market sentiment.

Analysis

Adidas's (ADDYY) recent turnaround narrative is facing scrutiny following weaker-than-expected second-quarter results, which were undermined by sluggish direct-to-consumer sales, a slowdown in the footwear segment, and notable challenges in Europe. This performance has raised investor concerns that the momentum driven by its popular Terrace product line is fading. However, analysis from UBS suggests a more optimistic outlook, cautioning against over-interpreting a single quarter's data. UBS posits that while the Terrace franchise's growth has moderated, newer product lines are beginning to compensate, with more significant contributions anticipated in the second half of the year, reflecting a typical nine-month product lifecycle. Supporting this view, management reported a sales pickup in Europe in July, and the company reiterated its guidance for double-digit growth across markets that represent 80% of total sales. Furthermore, earnings are expected to be shielded by favorable FX hedging through 2026. Despite this, with the stock trading at approximately 24 times 2025 earnings—a multiple UBS considers below its implied long-term growth potential—the upcoming Q3 results are positioned as a critical inflection point to validate the company's forward momentum.

Key Decisions for Investors

• Investors with a long-term horizon may view the current situation as an opportunity, given the valuation at 24x 2025 earnings is considered below the company's long-term growth outlook and UBS maintains a €274 price target.
• Closely monitor Q3 earnings for tangible evidence that new product franchises are successfully accelerating to offset the cooling of the Terrace line, as this is the pivotal catalyst for the stock's near-term performance.
• Traders and risk-averse investors should note the 'knife's edge' sentiment and acknowledge that another weak quarter could rapidly shift the narrative, making any position sensitive to upcoming performance data from Europe and other key non-U.S. markets.