Adidas records Q2 tariffs hit, flags cost increases

Adidas reported Q2 operating profit of €546 million, exceeding analyst expectations, and FX-adjusted net sales up 2.2% to €5.95 billion, supported by a higher gross margin. However, the sportswear firm projects new U.S. tariffs on imports from Vietnam and Indonesia, its largest sourcing hubs, will add approximately €200 million to second-half costs, following a "double-digit" million euro impact in Q2. The company increased inventories by 16% to €5.26 billion by frontloading purchases ahead of these tariffs, with CEO Bjorn Gulden expressing concern over potential indirect impacts on consumer demand, though full-year guidance was affirmed.

Analysis

Adidas demonstrated operational resilience in its second-quarter results, beating analyst expectations on operating profit with €546 million versus a €520 million forecast. This outperformance was supported by a 0.9 percentage point expansion in gross margin to 51.7%, driven by reduced discounting and lower product costs, which successfully mitigated currency and initial tariff impacts. However, this profitability was set against a weaker top-line, as currency-adjusted net sales grew 2.2% to €5.95 billion, falling short of the €6.2 billion consensus estimate and absorbing a negative currency translation effect of around €300 million. The most significant forward-looking challenge is the imposition of new U.S. tariffs, which are projected to add approximately €200 million to costs in the second half. This directly impacts the company's two largest sourcing countries, Vietnam (27%) and Indonesia (19%). In a proactive measure, the company increased inventories by 16% to €5.26 billion to frontload purchases, a strategy that mitigates immediate tariff costs but introduces risk related to holding costs and potential future discounting if consumer demand weakens, a concern voiced by the CEO. Despite these substantial headwinds, management's decision to affirm full-year guidance signals confidence in its ability to navigate the challenging trade environment.

Key Decisions for Investors

• Investors should weigh the company's proven operational execution, reflected in the Q2 operating profit beat and margin strength, against the material and quantified €200 million cost headwind from U.S. tariffs expected in the second half.
• It is critical to monitor inventory levels and sell-through rates in upcoming quarters, as the 16% inventory build-up to preempt tariffs could lead to future discounting and margin pressure if consumer demand falters.
• Consider the heightened geopolitical risk profile of Adidas due to its significant supply chain concentration, with 46% of its products sourced from Vietnam and Indonesia, countries now facing substantial U.S. tariffs.