This Friday (7th May 2021), Adidas AG (#adidas) – the largest sportswear manufacturer in Europe and the second largest in the world – will release its earnings report for the first quarter in 2021.
Following the launch of its “Creating the New” strategy in March 2015 , in the period from March 2015 to before the pandemic Adidas saw massive gains in sales from both North America and China, to approximately €7 billion, while net income grew by nearly €1.2 billion, which then boosted the company share price more than three-fold and created attractive returns for its stakeholders.
Recently, Adidas has announced its short-term projection for the next five years (2021 – 2025) with a new strategy called “Own the Game”, which according to CEO Kasper Rorsted, is focused on “increasing credibility of the Adidas brand, elevating the experience for consumers worldwide and pushing the boundaries in sustainability”, eventually improving sales and net income each year by 8%-10% and 16%-18%, respectively. (Source: Adidas Press Release)
For the upcoming earnings announcement, consensus median estimates for sales are €5.01 billion, up 14% from the previous year. Net income and earnings per share (EPS) from continuing operations are expected to record €0.432 billion and €2.25 respectively, both doubling the recorded figure in 2020.
On the other hand, while postponement of the European championships and Tokyo Olympics may serve as downside risks to the sportswear manufacturer, it has proved to be unlikely. Losses incurred are fairly limited and only made up approximately 0.3% of the company’s total revenue in 2019.
Nevertheless, a more significant risk to be considered is the ripple effect of the ‘Xinjiang’ event, which could lead to the company gradually losing its market share in China.
Recent comments from US Treasury Secretary Yellen that “rates may have to rise somewhat” (although she has since quickly clarified and denied), have sparked speculation for a stronger Dollar to come in the near term. A strong Dollar may not be beneficial to Adidas as the company manufactures most of its products in Asia, but pays its bills in dollars. In other words, the company runs the risk of higher purchasing costs as a result of a divergent Euro-Dollar relationship, thus lowering its profit margin.
In regards to monetary policy, the ECB’s policy decision is largely dependent on how successful European countries are in curbing the spread of the virus through their vaccination programmes. If the situation goes well and the members start discussing tapering, Adidas stock will not be spared from being affected negatively.
Technical Analysis:
The weekly chart shows that following the second failure of the #adidas share price to break through the session high at €306.60, it continues to weaken, leaving behind a rounding top pattern. It is currently trading below resistance level €271.55 (the same as 23.6% Fibonacci retracement level which extended from the lows in March 2020 to recent highs). Stochastics and RSI are both pressured below 50, while the fast line of the former is approaching the oversold zone.
The Daily chart shows that the share price has fallen below the support of the short-term channel trend line support. However, as of yesterday’s close, #adidas has managed to rebound from €250.00 (the same as 38.2% FR/psychological level), and closed up 2.7% during the day. Stochastics and RSI are turning upward at the lows, indicating the possibility of a technical rebound in share price in the near future. Resistance levels: 271.55 and 285.00; Support levels: 250.00 and 230.00.
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Larince Zhang
Market Analyst
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