Why did Adidas stock fall 19% despite record sales, FIFA World Cup boost?

Adidas shares plunged as much as 19% on Thursday, putting the German sportswear giant on course for its biggest one-day decline on record after higher marketing costs linked to the FIFA World Cup overshadowed record quarterly sales and a solid rise in earnings.

The company reported net profit from continuing operations of €398 million for the second quarter, up 6% from a year earlier but below analysts' expectations of €430 million.

The earnings miss came after Adidas increased marketing expenditure by 30% year over year as it ramped up spending on campaigns surrounding this summer's football tournament in North America.

The weaker-than-expected profit offset otherwise strong operating performance, with quarterly revenue reaching a record €6.7 billion, representing 14% growth at constant currencies.

Record sales fail to satisfy investors

The second-quarter revenue growth was supported by strong demand for football and running products, as well as continued momentum in Latin America and China, where Adidas has been gaining market share while rival Nike struggles with declining sales.

Despite the record sales, investors were disappointed that the company chose not to raise its operating profit outlook for the full year.

RBC Capital Markets analyst Piral Dadhania said both the earnings miss and the decision to leave profit guidance unchanged were likely to weigh on investor sentiment.

Chief executive Bjørn Gulden, however, expressed surprise at the market's reaction.

"We have delivered what we promised," Gulden said, adding that the second quarter had been "stronger than we expected."

The executive defended the company's aggressive World Cup marketing strategy, saying Adidas deliberately chose to capitalize on the tournament after assembling a strong portfolio of sponsored teams and products.

"We decided that, given the teams and products we had for the World Cup, we should spend real money on it," Gulden said, adding that marketing expenditure would normalize in the coming quarters.

Football investment boosts sales

The strategy helped Adidas generate approximately €1.5 billion in World Cup-related sales during the quarter.

The company said it sold four times as many national team jerseys and twice as many footballs compared with the Qatar World Cup four years ago.

Mexico's jersey emerged as the best-selling national team shirt, while the tournament final between Spain and Argentina featured two Adidas-sponsored teams, further strengthening the brand's visibility.

The company also benefited from a broader fashion trend, with football apparel increasingly crossing into mainstream streetwear.

Clothing sales climbed 35% during the quarter as consumers embraced football-inspired fashion beyond the tournament itself.

Footwear sales rose a more modest 1%, reflecting a more promotional environment across the lifestyle footwear market.

Nevertheless, Adidas said demand for its flagship Samba and Gazelle sneakers remained healthy.

Gulden acknowledged that the explosive growth previously seen in those retro styles was unlikely to continue indefinitely but argued that collaborations with artists such as Bad Bunny had broadened the appeal of the franchise.

Guidance remains cautious

Adidas modestly upgraded its sales outlook for the full year, saying it now expects currency-neutral revenue growth of between 9% and 10%, compared with its previous forecast of high-single-digit growth.

However, it maintained its operating profit target of around €2.3 billion, a decision that many investors viewed as conservative.

Gulden himself suggested the guidance could prove cautious, noting that the company had not assumed its direct-to-consumer business would continue expanding at the current pace.

Sales through Adidas-owned stores and online platforms increased 25% during the quarter, providing an important boost to margins despite the higher marketing spend.

Analysts at Deutsche Bank said the results represented "a good quarter in absolute terms" but argued that expectations had risen sharply ahead of the World Cup, making it difficult for the company to impress investors.

Analysts see long-term turnaround intact

Not everyone viewed the sharp share-price decline as justified.

Writing for Reuters Breakingviews, columnist Jennifer Johnson argued that the market reaction may reflect lingering concerns stemming from Adidas' past strategic setbacks rather than its current operating performance.

"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," she wrote.

Johnson said investors may still be influenced by memories of Adidas' difficult split with rapper Ye in 2022, which forced the company to write down inventory and navigate reputational challenges.

However, she noted that Gulden has engineered a significant turnaround since taking charge, with Adidas delivering shareholder returns that have comfortably outperformed rivals such as Puma and Nike.

"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," Johnson added.