Monday , September 28 2020

Can Adidas survive second wave?

Back in March, Adidas AG Chief Executive Officer Kasper Rorsted likened dealing with the Covid-19 outbreak to a football match. There was a great first half of the game before the virus struck. The half-time break was longer than expected, but play would eventually resume.
He showed just how damaging that halt was, but he said the tournament is now getting going again with a 1 billion-euro operating profit rebound expected in the next quarter. Adidas shares rose as much as 4.3%, but they are still down 15% this year, underperforming larger rival Nike.
Indeed, the anticipation of such a strong bounce back looks too optimistic, even if Adidas did beat sales and gross margin expectations in its second quarter. It seems there’s little to guarantee things will simply get better from here. After all, Nike badly missed sales expectations in its most recent quarter.
Adidas’s second quarter was buoyed by shoppers switching to online purchases with 70% of the company’s stores closed at the worst point in the three months to the end of June.
E-commerce sales nearly doubled. That helped limit the overall decline in sales excluding currency movements to 34%, better than the more than 40% fall the company forecast in April. The gross margin — the difference between the price at which a retailer buys and sells goods — also fell less than expected. But that didn’t stop Adidas diving into the red with an operating loss of 333 million euros ($391 million) after 250 million euros of one-time charges related to the virus, including an asset impairment at Reebok.
Still, in the three months through September, Adidas said it expects operating profit of between 600 million euros and 700 million euros. That would mean a recovery of about 1 billion euros from the second-quarter loss.
It’s impressive that the company has been able to pivot so successfully online, taking advantage of home workers swapping suits for sweatpants and seeking out new exercise gear to go with their new workout apps. Sales are improving gradually, including in the US market.
Both Adidas and Nike should also benefit from increased spending on health and wellness as people shift priorities and learn to live with a health threat. Unlike those selling luxury apparel and accessories, they aren’t dependent on the travel retail sector, where demand is likely to be depressed for some time.
But for Adidas, the expectation for such an outsized profit swing in the third quarter assumes that about 90% of its stores remain open, and visits to those outlets continue to pick up. With parts of the US far from returning to normal and a resurgence of cases in some European markets raising fears of a second wave, that assumption might not hold.


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