Adidas (OTC: ADDYY) the stock fell recently after the German athletic footwear and apparel maker released its third quarter results.

Its revenue fell 7% year-on-year (3% in constant currency) to 5.96 billion euros ($ 7.05 billion), marking its third consecutive quarter of declining sales as it struggling to recover from the pandemic. Its revenue fell 20% year-over-year (18% in constant currencies) in the first nine months of 2020.

Adidas’ net income from continuing operations fell 10% year-on-year to € 578 million ($ 685 million) in the third quarter and plunged 83% to € 291 million ($ 344 million) during the first nine months.

Those headlines initially sound terrible, but could Adidas stock still be worth buying if we look past its near-term pandemic headwinds?

A strong sequential recovery

Adidas’ year-over-year growth rates look dismal, but its revenue actually grew 66% sequentially from the previous quarter. Its gross margin also remained stable, despite the persistent pressure from promotions and currency headwinds, and its operating profit turned positive again with a double-digit operating margin:

Source: Adidas.

Adidas also reduced inventory by 10% sequentially in the third quarter, but focused on maintaining “profitable and disciplined wholesale” instead of widespread clearance sales.

As a result, Adidas maintained higher gross margins than Under protection (NYSE: UA) (NYSE: UAA) and Nike (NYSE: NKE) throughout the crisis.

UA’s gross margin declined 140 basis points sequentially to 47.9% in the third quarter, which ended September 30, as it sharply reduced revenue throughout the pandemic. Nike’s gross margin rose 750 basis points sequentially to 44.8% in the first quarter of 2021, which ended August 31, but was still weighed down by significant discounts and chain costs. ‘high supply.

But a second wave of infections could derail this recovery

For the fourth quarter, Adidas expects year-over-year revenue decline “low to mid single digits” in constant currency terms. Those forecasts appear stable, but Adidas also warned that the new wave of COVID-19 infections had already reduced its worldwide store open rate from 96% in late September to 93% in early November.

Image source: Adidas.

He also noted that “stricter social distancing guidelines” were having a “negative impact” on his store traffic, particularly in Europe, which represented 29% of its turnover in the third quarter. It also faces a difficult comparison with the fourth quarter of the previous year, when sales of its new UEFA Euro 2020 merchandise and the first shipments before the Chinese New Year holiday increased its total sales in China.

Although Adidas faces a difficult comparison in China, it expects the market to “return to growth” in the fourth quarter. This would be good news for the Asia-Pacific region, which accounted for 31% of its revenue in the third quarter.

Assuming countries do not implement any major lockdowns and its store open rate remains above 90% without a further traffic slowdown, Adidas expects to generate operating profit of $ 100-200 million. euros ($ 118 million to $ 170 million) in the fourth quarter, compared to operating income of € 245 million a year ago, as it focuses on “disciplined” sales rather than aggressive promotions.

Adidas is also reportedly considering a sale of Reebok, which generated 7% of its sales in the last quarter and remains much weaker than its main brand. The sale of Reebok could streamline operations and increase profits.

Beyond the COVID-19 crisis

Adidas’ revenue and profits will likely decline to double digits this year, and it’s hard to say whether a second wave of COVID-19 infections will disrupt its recovery next year.

However, Adidas and Nike have grown at comparable rates in recent years, and the two companies have easily upgraded Under Armor. Adidas’ gross and operating margins remain broadly stable and its growth is expected to stabilize and accelerate again after the end of the pandemic.

This is probably why Adidas stock remains up around 3% this year, even as its revenue and profits have fallen over the past three quarters. Adidas stock has already grown by around 250% in the past five years, but its future remains bright. Investors who buy this stock today should prepare for a few more difficult quarters, but they should reap bigger profits in the long run.