Adidas

Stock price: €42
Conclusion: Slight rebound at Reebok combined with a strong dollar lead us to upgrade our valuation range to €43-€45 per share. Nonetheless, we think Puma offers higher re-rating potential.

Q1 results: Sales up 4% to €2.6bn-Net income: €168m (€5m last year) EPS guidance 2010 raised to €2.05-2.30.

Looking for mid single digit organic growth in sales.
-Growth held back by wholesale. Sales increased by only 1% in Q1, impacted by lower revenues in China where Adidas lost share against Nike, Japan and Emerging Europe. The environment remains fragile in Europe with weakening consumer confidence in May. China is expected to be stronger in H2, following inventory clearance in the first half of the year. Sales should continue to be positively impacted by the FIFA World Cup in Q2 and Q3.
-Retail up 16% in Q1 (2228 stores) could grow double digit this year helped by store expansion (125 new stores in emerging markets) and mid single digit growth in comparable store sales.
-We expect both Adidas and Reebok to increase sales this year, albeit at a lesser rate for Reebok. Although the toning category is doing well, Reebok continued to report weak sales outside the US, notably in China and in Latam.

Management could further upgrade EPS guidance.
-Reported sales could grow almost double digit to €11.3bn, boosted by a weak euro.
-Gross margin could reach the top end of management forecast (around 47.4%), driven by lower input costs, faster growth in retail, lower level of clearance sales and a stronger Ruble. Adidas is 100% hedged for 2010 ($1.38), at rate slightly less favourable than in 2009.
-Operating expenses will benefit from positive leverage combined with headcount reductions in wholesale, offsetting higher marketing and retail spending. Operating margin could improve to 7% of sales.
-EPS could reach €2.36 in 2010, exceeding the top end of Adidas guidance ($2.05-2.30). 2011 outlook looks uncertain for two main reasons, first sourcing costs could be under pressure ( dollar exposure only 50% hedged), second the market remains very price competitive.

Adidas trades at 17.8x P/E based on 2010 estimates, implying 18% premium to Puma. A further rerating would require to bridge the margin gap between Adidas and Reebok (10 points ), which might take time. We favour Puma which is valued at lower multiple coupled with structurally higher margin.

Puma

Stock price: €251
Conclusion: Since our last comment (Feb 17th) Puma gained 17%. Q1 update, in line with our estimates, leads us to reconfirm our valuation range of €260-€275 per share. 10% upside left…

Q1 results: Sales down 2% to €683m-Adjusted EBIT up 4.4%. EPS up 2.8%. Guidance 2010: “sales should increase low to mid single digit-pretax profit to improve by at least 70%”.

As expected, Q1 results were contrasted.
-Top line was weak, posting a 2.7% decline in sales at constant rates. According to management, sales were slightly positive against last year’s numbers, adjusted for inventory clearance. Europe and Asia were down 6% and 8% respectively. The good news comes from Americas, where sales rose almost double digit.
-Puma’s order book points to a significant upturn in H2 in most regions, driven by easier comps, some benefits from the World Cup and lower inventories in China.
-Bottom line improved, again in line with our expectations. Gross margin was slightly up, thanks to Americas and Asia. Ebit margin improved 110bp in Q1, reaping the fruits of Puma’s cost reduction programme and the optimization of its retail network. Opex decreased 4.6% in Q1, lifting EBIT to €119m (17.4% of sales vs 16.3% last year).
-Puma’s guidance is in line with our estimates.

Puma trades at 16xP/E and 8.5xEV/EBITDA, implying 20% discount to Adidas.
We are still looking for 10% additional return in the coming months. PPR bought a few shares (around 5000) during the quarter.

Nike

Stock price: $74.2
Conclusion: Good resistance in Q3. We are slightly upgrading our valuation range to $72-$77 in light of improved worlwide future orders. Nonetheless, our pricing range suggests that Nike stock price looks close to its fair value.

Q3 results: sales up 7% reported (+2% organic-down 3% 9m), EPS adjusted up 2%, slightly down 9m. Guidance F10: Revenue slightly below last year levels, higher gross margin, low single digit increase in SG&A.

Good results ? yes Outstanding ? no
-Q3 showed a return to slight growth (2%) which is clearly encouraging. Looking at the 9m performance, Nike revenues fell 3%, which is better than Adidas down 6% in F09, but only slightly better than Puma (down 3.7% in 2009).
-We are more impressed by Nike’s achievement on the bottom line front. Nike succeeded in enhancing gross margin by 50bp in the first 9m, while its competitors Puma and Adidas lost 50bp and 330bp respectively in 2009. Nike managed to preserve that gain at the operating margin level thanks to a tight cost control. SG&A declined in line with reported sales, despite a sharp increase in Q3, related to marketing expenses, retail spending and compensation.
-Where does Nike stand from a profit margin standpoint ? YTD Gross margin at 45.9% is in line with Adidas (45.4%) but 5.4 pts lower than Puma (51.4%). Puma is more exposed to lifestyle apparel than Nike, where pricing is better. However, Nike’s control over selling and administrative expenses looks much better than peers, enabling it to achieve 13% operating margin, in line with Puma.
All in all, we are looking for stable sales and earnings for F10.

Looking for mid single digit growth in sales and low double digit growth in EPS for fiscal 2011.
-Worldwide future orders scheduled for delivery from March to July 2010 are up 6% organic. The good news comes from the US, up 4%. Orders from Eastern Europe and Japan were still negative, more than offset by growth in China, Latam and Western Europe. Nike benefits from its leading position in the premium end of the market in Greater China, which accounts for 17% of sales.
-Reported sales could be held back by a negative swing in forex based on current rates.
-Gross margin could slightly increase (+30bp to 46%), as a result of lean manufacturing, raw material consolidation, streamlined product line and faster growth in retail. In addition, faster growth in apparel should help margin.These factors should compensate for more headwind from freight costs, commodity increases and currencies.
-Nike pricing power seems under control thanks to clean inventories, down 17% currency neutral, even more in China (-27%).
-Selling and administrative expenses could benefit from positive leverage, helping to boost margin by further +60bp to 13.6%.
-We expect management to use its cash pile of $4bn to seize acquisition opportunities in the sector and buy back shares.

Nike trades at 18.4xP/E based on our calendar 10 estimates, in line with Adidas but at a 20%+ premium to Puma ( Nike’s premium exceeds 30% on EV/EBITDA basis). We think that Nike’s excellent earnings visibility is largely priced in. We believe that Puma offers greater rerating prospects.

Adidas

Stock price: €36.5
Conclusion: Lack of visibility for Reebock coupled with disappointing margin forecast for 2010 lead us to confirm that the stock looks fully priced. We slightly downgrade our valuation range to €37-€40 per share.

2009 results: in line with guidance. Sales down 4% to €10.4bn (-6% organic- flat in Q4). EPS down 60% to €1.22. Guidance 2010:low to mid single digit growth in sales -EPS to increase between €1.90 and €2.15.

Reebock’s lack of visibility
Sales declined 7% last year against a 5% decrease for Adidas. Q4 was better with 4% growth in the US, but more than offset by lower sales elsewhere (Reebock sales down 1% in Q4). Reebock looks too small to compete against iconic brands such as Adidas, Nike or Puma and too big to hold a distinctive niche positioning. Moreover, the new reporting structure which concentrates on channel rather than brand profitability does not send a positive signal to investors. Management expects Reebock to return to growth in 2010, thanks to new training shoes concepts such as Easy Tone and Zig Tech supported by increased communication spending. However, Adidas warned that growth should be skewed towards H2..

Disappointing margins outlook
Notwithstanding an expected positive swing in sales growth from -6% in 2009 to mid single growth in 2010, combined with positive hedging and lower input costs, Adidas projects only 6.5% operating margin against 4.9% last year. We think that earnings recovery could be held back by three factors:
-Continuing pricing pressure in mature markets
-Higher media spending (down €160m last year to 12.2% of sales) in anticipation of the FIFA World Cup. Management expects to exceed €1.3bn sales in the Football category.
-Higher retail investment (150 new stores and 200 remodellings), combined with spending in a new retail organisation.
Net earnings will benefit from lower financial expenses related to the net debt reduction to €917m (down €1.2bn in 2009). We are looking for €2.17 EPS this year, the top of the range of Adidas estimates for 2010.

Adidas trades at 16.7XP/E and 8.7XEV/EBITDA based on 2010 estimates, implying almost 20% premium to Puma. Our valuation range (€37-€40 per share) suggests little upside.

Puma

Stock price: €214.9
Conclusion: Bad news priced in. We expect the re-rating to be driven by bottom line recovery in 2010. We reiterate our valuation range of €260-275.

2009 results: Sales down 2.5% to €2,460m, down 3.7% like for like (-9% in Q4). Net earnings, including €127m restructuring charges, down to €128m (vs €233m 2008). Guidance 2010: Improvement in net result.

As expected, Puma continues to suffer from sluggish consumer demand.
Sales decreased by 3.7% excluding forex, implying a sharp 10% decline in Q4. The decline was more pronounced in Europe, but also in Asia, while the US market resisted quite well with sales down only 1%.
We expect sales growth in 2010 to be slightly positive, helped by
-easier comps in H2. Sales in H1 should further decline notably in Europe and in Japan and start to rebound in the second half of the year.
-cleaner inventories (down 19% in 2009)
-As the leading sponsor of African football federations, Puma should be a key beneficiary of the World Cup which will take place in South Africa.
- A stronger dollar leading to positive translation impact.
-lower negative impact from streamlining own retail compared with 2009. According to management, stores closures had a 4% negative impact on sales last year. 2010 will be again affected, but to a lesser extent (low single digit).

Better visibility on the cost side.
Despite lower sales, Puma lost only 50bp gross margin in 2009 (51.3%), while EBIT margin eroded by 90bp to 13% of sales. Interestingly, Q4 reported more than 400bp and 300bp gain in Gross and EBIT margin.
We expect Gross margin to remain stable in 2010 and EBIT margin to bounce back to 13.5% driven by:
-lower markdowns resulting from cleaner inventories
-higher costs savings attached to the restructuring programme implemented last year. Puma identified additional initiatives in Q4 leading to total cost of €128m (65% cash-35% non cash) in order to optimize the retail portfolio (18% of sales), the organizational structure and the re-engineering of operational processes. According to management, total savings should achieve €180m by the end of 2011, €35m in 2009, €108m in 2010 and €70m more by the end of 2011.
- These factors should more than offset lower hedging rates (€50m impact on our estimates) and higher marketing expenses attached to the sponsoring of the World Cup.
As a result, we expect sales and net earnings to reach €2.5bn and €236m respectively, slightly exceeding 2008 profits.

Positive cash management to allow share buy back
-Free Cash Flow more than doubled in 2009 to €255m, boosted by working capital inflow of €77m combined with lower capex (€55m). Assuming stable inventories and improved receivables, we expect working capital to be neutral this year and operating free cash flow to amount to €250m.
-Net cash position could rise to €470m by the end 2010.
-Management confirmed that they will start buying back shares this year, enabling PPR to further increase its stake (69.4% currently).

Puma trades at 13.6xP/E and 7.2xEV/EBITDA based on 2010 estimates (vs 14.8x and 8.2x respectively for Adidas). FCF yield amounts to 8%. Our DCF suggests a valuation of €275 per share.

Nike

Stock price: $64,8

Conclusion: Weathering the storm. Nike is showing a good resistance which is largely priced in. The stock looks fairly priced based on our valuation range of $65-$70 per share.

First half results: Sales down 8% reported to $9.2bn  (down 6% like for like), EBIT down 4% to $1.2bn, EPS down 2%. Guidance: Slight decline in sales, flat gross margin and SG&A stable.

Notwhitstanding “significant headwinds” Nike could end the year with sales only slightly down. Future orders ( scheduled for delivery from December 2009 through April 2010) are down 1% underlying and up 4% reported to $7bn, implying a strengthening trend. Nike is seeing positive signs in Western Europe, China and continuing growth in Emerging markets. North America, Japan and Eastern Europe remain under pressure.  Nike can rely on its strong retail network of 338 retail outlets in North America and 336 stores in international markets which partly offsets lower wholesale revenues . In addition, management expect the World Cup to drive sales growth in H2, notably in Europe and in Emerging markets.

Margin should slightly erode to 12% according to our estimates. COGS should remain stable helped by a positive forex impact in H2 and lower raw material and freight costs compensating for higher discount. Management warned that “we should expect unprecedented intensity in marketing efforts” linked to the World Cup. As a result, we project EBIT to reach $2.2bn vs $2.4bn last year, excluding exceptionals, and EPS to decline by 6%.

Nike trades at 17xP/E based on 2010 calendar estimates, versus 15.7x for Adidas and 14.9x for Puma. Nike’s premium looks justified by its superior earnings visibility, coupled with a very solid balance sheet. However, we see little upside based on our valuation range of $65-$70 per share. We think that Puma offers greater re-rating prospects.

Adidas

Stock price: €38

Conclusion: The stock looks fairly valued based on our valuation range of €38-€42 per share. Uncertainty regarding Reebok should prevent short term re-rating. We prefer to invest in Puma which trades at a similar 15x P/E multiple based on 2010 estimates.

9 months: net sales down 3.7% to €7.9bn (-7% like for like), EBIT down 52% to €465m, net income down 62% to €226m. Full year guidance : €1.15-1.30 EPS (€3.1 EPS in 2008).

A temporary setback for Adidas and Taylor Made
- 2009: A Perfect Storm
Management confirmed that EPS should fall by 60% in 2009, as a result of unprecedented challenges. Lower demand and downtrading for sporting goods everywhere except in Latin America, combined with excess inventories in the US, Europe and China. Rising input costs, restructuring expenses in Europe and in Asia, integration costs following the acquisition of Ashworth, and structural difficulties at Reebok.
The only good news comes from the cash management, as cash flow from operating activites was €122m vs €100m outflow at the end of Sept. 2008, and net debt decreased €299m to €2.3bn (end Sept).

- 2010 to benefit from improved costs structure.
Notwithstanding the expected positive impact of the 2010 world cup, Adidas might continues to feel the pressure from low consumer demand, while retailers want inventories to remain under control. However, gross margin in 2010 will benefit from the impact of less inventory clearance combined with lower input costs. In addition, Adidas should reap the fruits of the new operating structure announced in May: elimination of regional offices and implementation of joint operating models in Europe and Latin America.
We expect sales to increase by 3% but EBIT to reach €880m vs €547m projected in 2009, and EPS to rebound to €2.46 per share.

Far less visibility on Reebok
Adidas has not been able to turn around Reebok, acquired in 2005, neither in good nor bad times. We expect Reebock to report €140m losses in 2009. Reebock struggles to find a positioning between iconic brands such as Nike, Adidas and Puma. As a result, pricing power is weak and leads to depressed gross margin (30% vs 46% for the Adidas brand).
We think that management should refocus on Adidas and Taylor Made, which implies a risk of impairment (€425m goodwill in Adidas balance sheet).

Adidas trades at 15.3x P/E and 8.4xEV/EBITDA based on our 2010 estimates, at a slight premium to Puma. We don’t think that Adidas is expensive based on our valuation range. However, investors might prefer to invest in Puma as long as Reebock remains an issue.

Puma

Stock price: €231
Conclusion: Improved visibility on the bottom line coupled with a potential bid from PPR, Puma’s main shareholder should propel further upside. We estimate the fair price of Puma within a valuation range of €260-275, excluding a bid premium.

9 months: Sales up 0.4% to €1.971m, down 2% excluding forex, adjusted EPS down 10.6%, reported down 49% to €112m.

We expect the consumer environment to remain challenging in Q4 and next year
Q3 did not show any improvement with sales down almost 10% like for like, notably in footwear and apparel. Rising unemployment and low consumer confidence should prevent sales from rebounding in coming quarters. In addition, growth in reported sales will be held back by a weaker dollar. However, 2010 could be slightly better than 2009, owing to lower inventories in wholesale (around 80% of sales) and some positive impact expected from the football World Cup in South Africa. We expect sales to increase by 1-2% next year.

Bottom line ? looking for a rebound next year.
We feel reasonably confident for a number of reasons.
First, cash management was impressive this year. Lower capex and improved working capital led to a €128m increase in free cashflow to €145m in the first nine months. We expect free cashflow to amount to €180m for the whole year and net cash position to increase to €280m by the end of 2009. Free cash could achieve €210m next year.
Second, COGS could decrease as a result of less promotional activity following inventory reductions in 2009. In addition, Asian sourcing should benefit from the weakness of the dollar in 2010, but even more in 2011 due to the impact of hedging.
Third, the restructuring charge taken in Q1 (€110m) is expected to generate savings of €150m by the end of 2011. We think that savings in selling and administrative expenses should more than offset increased marketing spending related to the World Cup.
We expect ebit margin before restructuring to improve from 12.4% forecasted in 2009 (down 240bp of sales) to 13.5% of sales in 2010. Net earnings could rebound to €236m vs €134m projected this year.

PPR bidding for the free float ?
We think that the listing of a majority stake in CFAO should give PPR a greater room for manoeuvre and help to take the full control of the cash by taking Puma private . Such a move should be earnings accretive and partly offset the dilution anticipated from the listing of CFAO. We also believe that PPR should move before Puma reaps the full benefits of its restructuring programme in 2011.

Puma trades at 14.7xP/E and 7.9x EV/EBITDA based on 2010 forecast. FCF yield amounts to 6%. Our valuation range €260-275 suggests 15%+ upside, excluding a bid premium paid by PPR.