Huge profit warning; EPS guidance cut by c25%
(PDF ATTACHED)
FY14 guidance cut from EUR830-930m to around EZR650m
Adidas just issued a huge profit warning: net income guidance was cut to EUR650m (implying EPS EUR3.11 undiluted), vs. a guidance range before of EUR830-930, i.e. a 26% cut vs. guidance mid-point. DBe is EUR835m, cons 839, i.e. new guidance is some 22% below market expectations. The latter could be indication for the short-term downside of the share price.
Reasons for the warning
* ”poor retail sentiment and the slow liquidation of old inventory in the golf category”; adidas to begin a restructuring program at TaylorMade (remember that Taylormade’s CEO was promoted to the CEO of the group’s Americas region lately)
* ”recent trend change in the Russian rouble as well as increasing risks to consumer sentiment and consumer spending from current tensions in the region”; store opening plan massively cut, store closures instead; remember that we estimate that Russia is some 14% of group EBIT, so this is really bad news; Russia might well turn into a major problem for them (store closures are costly)
* ”Management has decided to step up marketing and point-of-sale investments over the next 18 months to secure and drive faster growth rates and market share gains, particularly in the developed markets such as North America and Western Europe”; this is not to drive faster growth in our view, but they defend themselves against Nike which has become much more aggressive as of late; remember: Nike’s marketing spending was up 36% (!) in the May quarter
* ”Management has completed an in-depth review of the Global Brands and Global Sales structures”; new organizational structure to take effect 1 August 2014; details still need to be clarified, but this reorganization might also result in extra costs
SUMMING UP
We think the warning shows under how much pressure adidas currently sees itself; we find the warning alarming. With a new EPS guidance of just above EUR3, adidas trading on the same levels which it has traded on over recent weeks (at FY14 P/E of 18-20x) could result in massive short-term downside risk for the share price. We will follow up with a detailed note in due course.