(Bloomberg) -- Adidas AG raised its annual profit target for the second time in three months amid soaring demand for classic sneakers like the Samba and more sales from the shrinking stockpile of Yeezy footwear.
The German sportswear company now expects to generate operating profit of around €1 billion ($1.09 billion), according to a statement. That’s up from the previous forecast of €700 million and in line with analyst estimates.
Second-quarter sales also beat expectations, rising 11% from a year earlier. Excluding Yeezy products, sales would have risen by 16%, showing that Adidas’ recovering core business is becoming less dependent on the erstwhile collaboration with rapper Ye than it was last spring and summer.
Adidas shares rose 3.2% early Wednesday in Frankfurt. They’re up 36% in the past year, while those of rival Nike Inc. have fallen about 34% over that period.
Chief Executive Officer Bjorn Gulden is trying to orchestrate another era of fast growth at Adidas by churning out hot-selling products with more regularity, embracing retail partners again and doubling down on the brand’s focus on sports. He’s seeking to close the gap with industry leader Nike, which is struggling to replace top sellers such as the Air Force 1 and Dunk sneakers to fuel growth.
Returning Growth
Adidas’s net sales shrank last year, hurt by the canceled partnership with Ye. The company has said it expects momentum to accelerate in the second half as it trims inventories of Yeezy footwear and apparel in the US. Adidas has also seen strong demand for other classic models such as the Gazelle, Spezial and Campus.
“Adidas has idiosyncratic brand and product momentum that is not fully reflected in consensus expectations, and underpins our positive equity view on the stock,” Piral Dadhania, an analyst at RBC Capital Markets, said in a note.
Investors will be optimistic about the acceleration of non-Yeezy product sales, and curious how much of that momentum is coming from wholesale channels, James Grzinic, an analyst at Jefferies, said in a note. The company will offer more information on that when it releases full quarterly results on July 31.
For now, Adidas has a rare opportunity to make up ground on its much larger rival Nike, which is dealing with problems that Adidas has also faced in recent years. The US company is resorting to layoffs and other belt-tightening measures after a move to prioritize its own sales channels failed to produce the promised levels of profits and growth.
When Nike curtailed its reliance on retail partners in recent years, they began pushing rival brands. The wave of competition from newer labels such as On Holding AG and Deckers Outdoor Corp.’s Hoka is now forcing Nike to backtrack some, vowing to prioritize sports, new products and wholesale partners again.
Adidas has made a similar pivot under Gulden, who took over as CEO in January 2023 after nearly a decade leading crosstown rival Puma SE.
Samba Shoes
Weeks into his tenure, Gulden called for an acceleration in the rollout of the classic Samba sneaker. That bet is paying off as the Yeezy business tails off. The latter contributed about €50 million in operating profit during the second quarter, or about 14% of the total. At its height, Yeezy footwear was generating close to half of Adidas’ profit.
With its upgraded forecast, Adidas is again assuming that it will sell the remainder of its Yeezy products at cost. If it were to do that this year, it would generate about €150 million in revenue from the franchise but no profits, the company said. Adidas has repeatedly made that assumption in its forecasts, then gone on to post profits from Yeezy sales.
Beyond Yeezy, Adidas’ underlying business benefited in the quarter from lower levels of discounting, lower sourcing costs and better demand for its three-striped products focused on athletic performance. Even so, unfavorable currency effects are continuing to weigh on profits, the company.
--With assistance from John Lauerman.
(Updated with analyst comments and background material throughout)
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