BREAKINGVIEWS-Adidas counts cost of premature goal celebration 

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Johnson

LONDON, July 30 (Reuters Breakingviews) - Bjorn Gulden is a bit like a soccer player celebrating a goal that subsequently gets ruled out by VAR. Presenting half-year results on Thursday, the Adidas ADSGn.DE CEO waxed lyrical about the "fairy tale" that was the recent World Cup, in which the $30 billion company invested heavily via a marketing splurge. As such, the 17% slump in his share price requires some unpacking.

In one sense, investor booing is hard to explain. As a global shop window for its sportswear and shoes, it's hardly surprising Gulden decided to hike marketing spend by 30% to €924 million. This included sponsorship of the tournament's eventual finalists, Spain and Argentina, as well as Germany and Mexico. More to the point, it worked – "generating 9 billion views across its digital footprint" meant sales in the three months to the end of June hit a record high of €6.7 billion. Better still, the German company's full-year sales outlook has been revised from “high-single-digit growth” to "between 9% and 10%".

The obvious culprit is profitability. According to a poll compiled by Visible Alpha, analysts were expecting quarterly operating profit to come in at around €623 million, not the €574 million that transpired. That means the company's operating profit margin dipped – while it was 9.6% for the first half, in the second quarter this fell to 8.5%.

All things equal, this shouldn't matter much. Adidas is still targeting a 10% operating margin in 2027, a person familiar with the situation told Breakingviews. On that reading, it's hard to see why a temporary dip in profitability should be taken as a sign of longer-term stress.

One explanation could be muscle memory of past strategic missteps. In 2022 Adidas endured a painful corporate divorce from its former influencer star Ye, necessitating a lengthy period of offloading inventory after the scrapping of a line of popular trainers, as well as reputational pain. Yet since then Gulden has turned things around – total shareholder returns since 2022 have far outpaced those of rivals Puma PUMG.DE and Nike NKE.N.

A simple way for Adidas to stop the rot would be to show in the next few quarters that the margin dip was a one-off. If so, investors may see Gulden's World Cup campaign as more of a triumph than they currently do.

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CONTEXT NEWS

Shares in German sportswear group Adidas slid more than 17% on July 30, as disappointing operating profit outshone sales progress in the first half.

The company is now expecting revenue to grow by a currency-adjusted 9% to 10% in the full financial year, compared to a previous forecast of “high single digit growth”. However, the €574 million in operating profit it booked in the three months to the end of June was well below analysts’ consensus expectations of €623 million. The culprit was a 30% increase in marketing spend around the football World Cup.

Adidas’ shares were trading near €150 as of 0930 GMT – down from the prior afternoon’s close of €181.

(Editing by George Hay; Production by Oliver Taslic)

((For previous columns by the author, Reuters customers can click on JOHNSON/Jennifer.Johnson@thomsonreuters.com))