adidas: Valuation Is Not Reflecting The Improved Fundamentals (Rating Upgrade)

Analyst upgrades adidas to Buy after FY25 results showing 13% FX-neutral revenue growth and 54% EBIT growth even excluding Yeezy contributions. North America has shifted from a drag to a growth contributor, reducing a key turnaround risk and supporting the thesis of broad-based recovery and improved product quality.

Analysis

Adidas’s inflection should be read through product-cycle and channel mechanics rather than headline recovery language. If full-price sell-through in core doors is improving, that implies structurally higher gross margins via price/mix and less need for promotional working-capital — a three-to-six month lever that can convert to free cash flow faster than market consensus appreciates.

Second-order beneficiaries include upstream OEMs in Vietnam/Indonesia and synthetic-leather suppliers: better sell-through usually tightens order books and shortens lead times, which can push development backlogs at contract manufacturers and leave late-cycle competitors with excess inventory. Conversely, players who leaned on aggressive discounting or resale-dependent hype are most exposed if full-price dynamics reassert.

Key catalysts to watch are 1) seasonal sell-through data (next 3 months), 2) buy vs. wholesale mix shifts that show up in gross margin line items (quarterly), and 3) forex and freight normalization — each can pivot the story materially. Tail risks include a re-acceleration of off-price inventory flows, a major new product miss, or competitor marketing dumping that erodes realized prices; any of these could reverse relative performance within 1–4 quarters.

Key Decisions for Investors

• Initiate a 6–12 month long position in ADDYY (10–12% portfolio segment for growth sleeve). Thesis: capture re-rating as margin recovery proves durable; target 30–40% upside if EBITDA multiple re-expands by 2–3 turns. Hard stop at 20–25% drawdown or fundamental read-throughs of weakening sell-through.
• Buy a defined-risk call spread on ADDYY with 6–12 month tenor (size ~50–60% of the equivalent equity exposure) to participate in upside while capping premium decay. Use this if you prefer asymmetric risk — implied vols have been elevated post-earnings so spread narrows breakeven vs naked calls.
• Pair trade: go long ADDYY / short NKE (ratio sized to neutralize S&P consumer beta) over 3–6 months. This isolates brand-specific execution and product quality improvements versus broad US consumer cyclicality; expect alpha if Adidas continues to regain retail door momentum while Nike faces calendar-driven promotional cadence.
• Event hedge: buy short-dated puts on European discretionary high-multiple peers (size small, 1–2% portfolio) ahead of the next quarter’s retail sell-through prints. This protects against a sector-wide pullback if off-price channels re-emerge as dominant and compresses multiples across the group.