RiverPark Says Adidas AG (ADS) Has Substantial Worldwide Secular Growth Potential

RiverPark Large Growth Fund is bullish on Adidas AG (ETR: ADS) which didn’t deliver a positive performance on the stock market during the second quarter of 2018, with shares declining 9% for the quarter. Discussing Adidas in its Q2’18 investor letter, the fund noted that the company has “the potential for substantial worldwide secular growth, particularly by closing its underperformance gap with NKE in North America.” In this article, we’re going to take a look at the fund’s comments about Adidas. Here is what it said about the company:

Adidas shares declined 9% for the quarter. Although the company reported strong quarterly results and reiterated guidance, some investors perceived management’s commentary regarding 2H18 growth to be overly cautious resulting in a sell-off in Adidas’s shares. First quarter results were headlined by a 10% increase in currency-neutral sales driven by a 23% increase for Adidas North America, 26% for Greater China, and 27% for e-commerce; however, Western Europe, accounting for 28% of revenue and its most mature market, grew only 4%. A 150 basis point increase in gross margins and a 180 basis point increase in operating margin to 13.4%, resulted in EPS growth of 16%. For the balance of the year, while management reiterated guidance of around 10% sales growth, 9%-13% operating profit growth, and EPS from continuing operations growth of 12%-16%, they also reminded investors that parts of Europe were struggling and that recent market share gains in North America should not be expected to continue at such an elevated pace. We view this commentary as normal conservativism from this management team and continue to expect the company to generate strong revenue and margin gains throughout the year.

We continue to believe that Adidas has the potential for substantial worldwide secular growth, particularly by closing its underperformance gap with NKE in North America, where it also lags substantially in margin. In addition, we expect the company’s profit growth to be substantially greater than its sales growth in the coming years as the combination of greater corporate efficiency and increasing direct-to-consumer business continues to drive gross and operating margins higher.

Germany-based Adidas AG (ETR:ADS) is a designer and manufacturer of shoes, clothing and accessories. Adidas is the largest sportswear manufacturer in Europe and the second largest in the world. For the full-year 2018, the company expects sales to increase at a rate of around 10% on a currency-neutral basis, driven by double-digit growth in North America and Asia-Pacific. The company’s gross margin is forecast to increase up to 0.3 percentage points to a level of up to 50.7% (2017: 50.4%). Net income from continuing operations is projected to increase to a level between € 1.62 billion and € 1.68 billion. EPS from continuing operations is expected to increase at a rate between 12% and 16% compared to the prior-year level of € 7.05.

On the stock market, Adidas has been performing well this year, with the stock value moving up 24.96% year-to-date. The company’s share price has increased 10.44% over the past three months and 8.53% over the past 12 months.

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