Morning Note: Market news and an update from adidas.
Market News
US equity markets moved up last night – S&P 500 (+0.3%); Nasdaq (+0.9%) – as investors waited to hear more from Federal Reserve officials who are due to speak this week, including Chair Jerome Powell. So far, officials have emphasised the need to get consumer prices down to their 2% target, with Michelle Bowman reiterating that she expects more hikes. “Inflation still remains too high,” Lorie Logan said. But the bond market is betting on a dovish pivot — one that may represent yet another false dawn, according to Deutsche Bank’s Henry Allen. Treasuries rose, with the 10-year yield falling to 4.58%, while gold trades at $1,968 an ounce.
This morning in Asia, markets drifted lower: Nikkei 225 (-0.3%); Hang Seng (-0.6%); Shanghai Composite (-0.2%). The FTSE 100 is currently trading 0.1% higher at 7,417. Sterling buys $1.2260 and €1.1490. The oil price continued its recent slump, with Brent currently trading at $81.64 a barrel as bearish demand indicators grow.
According to the IMF, Europe’s economy is unlikely to crash — even as a more-than year-long bout of rate hikes tame inflation. “The outlook for Europe is for a soft landing, with inflation declining gradually,” the fund said, predicting regional GDP growth will improve slightly to 1.5% in 2024. But it warned that returning CPI growth to normal levels may take several years. Against that backdrop, German CPI inflation for October came in as expected at 3.8%.
China’s VP Han Zheng said recent high-level meetings between his country and the US send a “positive signal” for the world. Biden will hold bilateral talks with Xi Jinping on 15 November on the sidelines of the Asia-Pacific Economic Cooperation summit in San Francisco, Kyodo News reported. However, China is struggling to lure back foreigners as data suggest companies are diversifying their supply chains to reduce risks. FDI outflows of $11.8bn in Q3 marked the first contraction since records started.
Source: Bloomberg
Company News
Last night, adidas released its Q3 results and provided further detail than in the trading update on 17 October. The business continued its recovery and in response the shares have been marked down by 1% in early trading this morning.
adidas is a multi-brand sporting goods company. Its products have traditionally had a broad global appeal from serious athletes, casual athletes to sports fashion, and from mid-price to high-price points. As a result, the group should be well placed to benefit from the continued focus on health and fitness, the rising middle class in emerging markets, and fashion trends in sportswear.
However, over the last year, trading has been mixed, partly due to the termination of the adidas Yeezy partnership, leading to a string of profit warnings. The company continues to unwind the impact by selling the remaining Yeezy inventory, with a potential write-off of a further €300m. The company also undertook a strategic review, the one-off costs of which are expected to be up to €200m.
However, the underlying adidas business has developed better than expected and reflects a focus on conservative sell-in and full-price business. The group has scaled up supply but is far from covering the total current demand.
During the three months to 30 September, revenue grew by 1% in currency-neutral terms to €6.0bn. Excluding the impact of the Yeezy revenue, growth was 2%.
By category, Footwear grew by 6%, reflecting double-digit growth in adidas Originals as well as in the football and basketball categories. Apparel fell by 6% as the group faced a tough comparative versus last year’s Football World Cup. Accessories fell by 3%. Overall, the group has seen good improvement in its Performance products, especially in football and running, but also in basketball and US sports.
By channel, Wholesale fell by 2%, while Direct-to-Consumer grew by 5%, made up of own retail (+10%) and ecommerce (+1%). The focus on the Direct-to-Consumer business is to give less discounts, increase the full-price share, and balance brand building with commercial success.
Growth was driven by all regions except North America which fell by 9% as it was affected by elevated inventory levels in the market. Elsewhere, the company achieved growth in EMEA (+2%), Asia Pacific (+7%), Greater China (+6%), and Latin America (+13%).
The company’s gross margin grew by 20 basis points in the quarter to 49.3%, driven by reduced freight costs, a more favourable business mix, and lower inventory allowances. In addition, discounting levels continue to improve. Operating profit fell by 27% to €409m, with the operation margin falling from 8.8% to 6.8%.
Adjusted net borrowings as at 30 September were €5.2bn, down more than €800m on the previous year. The group’s conservative sell-in strategy is paying off, with the inventory position improving substantially versus the previous quarter to €4.8bn, down 23% year-over-year.
The group sees the interest in its brand and products increasing in all markets and are now experiencing a visibly higher interest from retailers for the sell-in for the Fall/Winter 2024 range. At the time of last month’s trading update, the group raised its full-year guidance, and has reiterated its targets this morning. Currency-neutral revenue is expected to decline at a low-single-digit rate. The company is also expecting a small operating loss of €100m, including a possible €300m write-off of the remaining Yeezy inventory and one-off costs of €200m related to the strategic review. In Q4, the group will continue to focus on its priorities and lay the foundation for an improving 2024 and a successful 2025 and 2026.
Source: Bloomberg